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 17% 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) | $ | 180,000 | $ | 390,000 | |
| Annual revenues and costs: | |||||
| Sales revenues | $ | 260,000 | $ | 360,000 | |
| Variable expenses | $ | 124,000 | $ | 174,000 | |
| Depreciation expense | $ | 36,000 | $ | 78,000 | |
| Fixed out-of-pocket operating costs | $ | 71,000 | $ | 51,000 | |
|
The companys discount rate is 15%.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.
Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.)
2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)
3. Calculate the internal rate of return for each product | |||||
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