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 21% 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)	$	210,000		$	420,000
Annual revenues and costs:
Sales revenues	$	290,000		$	390,000
Variable expenses	$	138,000		$	186,000
Depreciation expense	$	42,000		$	84,000
Fixed out-of-pocket operating costs	$	74,000		$	54,000

The companys discount rate is 19%.

Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor using tables.

Required:

4. Calculate the project profitability index for each product.

5. Calculate the simple rate of return for each product.

6a. For each measure, identify whether Product A or Product B is preferred.

6b. Based on the simple rate of return, Lou Barlow would likely: