Question
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) | $ | 330,000 | $ | 515,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 370,000 | $ | 470,000 | |
Variable expenses | $ | 168,000 | $ | 218,000 | |
Depreciation expense | $ | 66,000 | $ | 103,000 | |
Fixed out-of-pocket operating costs | $ | 82,000 | $ | 68,000 | |
The companys discount rate is 15%.
Required (Use Excel for 2 - 4):
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the profitability index for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
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