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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five-year period. His annual pay raises are determined by his divisions return on investment (ROI), which has exceeded 24% each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Product A Product B
Initial investment:
Cost of equipment (zero salvage value) $ 320,000 $ 515,000
Annual revenues and costs:
Sales revenues $ 370,000 $ 470,000
Variable expenses $ 168,000 $ 218,000
Depreciation expense $ 64,000 $ 103,000
Fixed out-of-pocket operating costs $ 82,000 $ 62,000

The companys discount rate is 22%.

Use Excel or a financial calculator to solve any time value of money problems.

Required:
1.

Calculate the payback period for each product. (Round your answers to 2 decimal places.)

Product A Product B
Payback period 120,000.00 years 190,000.00 years

2.

Calculate the net present value for each product. (Round answers to the nearest dollar.)

Product A Product B
Net present value $23,680 $29,160

3. Calculate the project profitability index for each product. (Round your answers to 2 decimal places.)

Product A Product B
Project profitability index 1.07 1.06

4.

Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

Product A Product B
Simple rate of return 17.5 % 16.9 %

5a.

For each measure, identify whether Product A or Product B is preferred.

Net Present Value Profitability Index Payback Period
Product B Product A Product A

5b.

Based on the simple rate of return, Lou Barlow would likely:

Accept Product A
Accept Product B
Reject both products

Please answer in the exact format.

Thanks

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