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 23% 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) | $ | 290,000 | | $ | 490,000 |
| Annual revenues and costs: | | | | | |
| Sales revenues | $ | 340,000 | | $ | 440,000 |
| Variable expenses | $ | 154,000 | | $ | 206,000 |
| Depreciation expense | $ | 58,000 | | $ | 98,000 |
| Fixed out-of-pocket operating costs | $ | 79,000 | | $ | 59,000 |
| |
The companys discount rate is 15%.
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determine the appropriate discount factor using tables.
Required:
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 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:
EXHIBIT 7B-1 Present Value of $1; 1 Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 3% 4% 5% 16% 7% 18% 19% 20% 21% 22% 23% 24% 25% 1 0.962 0.952 0.943 0935 0926 0.97 0.909 0901 0893 0.885 0877 0870 0862 0.855 0847 0840 0833 0826 0820 0.83 0806 0800 2 0.925 0.907 0.890 0.873 0.857 0.842 0826 0812 0.797 0783 0.769 0.756 0.743 0731 0.718 0706 0694 0.683 0.672 0.661 0650 0.640 10889 0.864 0.840 0816 0.794 0.72 0.751 0.731 0712 0.693 0675 0658 0.641 0624 0609 0593 0.579 0.564 0.551 0537 0.524 0512 0.855 0823 0792 0763 0735 0708 0683 0659 0636 0613 0.592 0572 0552 0.534 0.516 0499 0.482 0467 0451 0437 0423 0410 5 0822 0784 0.747 0713 0.681 0650 0621 0.593 0.567 0.543 0.519 0.497 0476 0.456 0.437 0.419 0.402 0.386 0.370 0.355 0341 0328 6 0790 0.746 0705 0666 0.630 0596 0564 0535 0.507 0.480 0.456 0.432 0410 0390 0.370 0352 0.335 0.319 0.303 0.289 0275 0262 10.760 0.711 0665 0623 0.583 0.547 0.53 0482 0452 0425 0400 0.376 0354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 10.731 0.67 0627 0.582 0.540 0502 0467 0434 0404 0376 0351 0327 0305 0285 0266 0.249 0233 0.218 0.204 0191 0.179 0168 | 0703 0.645 0592 0.544 0.500 0.460 0424 0391 0.361 0333 0308 0.284 0263 0243 0.225 0209 0194 0180 0167 0155 0144 0134 10 0.676 0.614 0558 0.508 0463 0422 0386 0.352 0.322 0.295 0.270 0.247 0227 0.208 0191 0176 0.162 0.149 0137 0126 0116 0107 0650 0.585 0.527 0475 0429 0388 0350 0.37 0.287 0.261 0.237 0.215 0195 0.178 0.162 0.148 0135 0123 0112 0103 0.094 0.086 2 0625 0557 0.497 0.444 0397 0356 0319 0.286 0257 0.231 0.208 0187 0.168 0152 0.137 0124 012 0102 0092 0083 0076 0.069 10601 0530 0469 0415 0.368 0.326 0290 0.258 0.229 0204 0182 0.163 0145 0130 0116 0104 0093 0.084 0.075 0.068 0.061 0.055 057 0.505 0.442 0388 0340 0.299 0.263 0232 0.205 0.181 0160 0.141 0125 011 0099 0.088 0078 0069 0062 0055 0049 0044 5 0555 0.481 0.417 0.362 0315 0275 0.239 0.209 0183 0160 0140 0123 0.108 0.095 0.084 0.074 0.065 0057 0051 0045 0040 0.035 10.534 0.458 0394 0339 0.292 0.252 0218 0188 0.163 0141 0123 0107 0.093 0081 0.071 0062 0.054 0047 0042 0.036 0.032 0.028 10.513 0436 0371 0.37 0270 0.231 0198 0.170 0146 0125 0108 0.093 0.080 0.069 0060 0.052 0045 0.039 0034 0030 0026 0023 0494 0416 0.350 0296 0.250 0.212 0180 0153 0130 011 0.095 0.081 0069 0.059 0051 0.044 0038 0.032 0.028 0024 0021 0018 | 0475 0396 0.331 0277 0232 0194 0.164 0138 0116 0098 0.083 0070 0.060 0051 0043 0037 0.031 0027 0.023 0020 0.07 0.014 20 0.456 0.377 0312 0.258 0215 0.178 0.149 0124 0104 0.087 0073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0. 04 0.012 10.439 0359 0.294 0.242 0199 0164 0.135 0112 0.093 007 0064 0.053 0044 0037 0031 0026 0022 0018 0015 0013 0.01 0009 22 0422 0.342 0278 0226 0184 0150 0123 0101 0.083 0.068 0.056 0046 0.038 0.032 0.026 0.022 0.018 0015 0.013 0.01 0.009 0.007 0406 0.326 0.262 0.211 0170 0.138 0112 0.091 0074 0060 0.049 0.040 0033 0027 0.022 0018 0015 0.012 0010 0.009 0007 0006 10.390 0.310 0.247 0197 0.158 0.126 0102 0.082 0.066 0.053 0043 0.035 0.028 0023 0.019 0.015 0013 0.010 0008 0007 0.006 0.005 10375 0.295 0.233 0184 0146 0116 0.092 0.074 0.059 0047 0.038 0.030 0.024 0.020 0.016 0.03 0.010 0.009 0.007 0.006 0.005 0.004 10.361 0.281 0.220 0.172 0135 0106 0084 0066 0053 0042 0033 0026 0021 007 0014 0011 0009 0007 0.006 0005 0.004 0003 27 0347 0.268 0.207 0161 0.125 0.098 0076 0060 0.047 0037 0029 0023 0018 004 0011 0009 0007 0006 0.005 0.004 0.003 0002 10333 0.255 0.196 0150 016 0.090 0069 0054 0.042 0033 0026 0.020 0016 002 0010 0.008 0006 0005 0.004 0003 0002 0002 29 0321 0.243 0185 0.141 0107 0.082 0063 0.048 0.037 0.029 0.022 007 0014 0.01 0.008 0.006 0.005 0004 0.003 0.002 0.002 0.002 30 0.308 0231 0174 0.131 0.099 0.075 0.057 0.044 0.033 0026 0.020 0.05 0.012 0009 0.007 0005 0.004 0.003 0.003 0.002 0.002 0.001 | | 40 0.208 0142 0.097 0.067 0.046 0032 0022 0.015 0.01 0008 0005 0.004 0.003 0.002 0001 0.001 0001 0000 0.000 0000 0.000 0.000 EXHIBIT 7B-2 Present Value of an Annuity of $1 in Arrears; 1 00 voow Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 2 1.886 1.859 1833 1.808 1783 1.759 1736 1713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.509 1.492 1.474 1.457 1.440 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 2.074 2042 2.011 1981 1952 4 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.1993.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 6 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 9 7.435 7108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 10 8.111 7722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 4.054 3.923 3.799 3.682 3.571 8.760 8.306 7.887 7.499 71396.805 6.495 6.207 5.938 5.687 5.453 5.234 5.0294.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656 9.385 8.863 8.384 7.943 7.536 71616.814 6.492 6.194 5.918 5.660 5.421 5197 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 9.986 9.394 8.853 8.358 7.904 7.487 7103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 4.362 4.203 4.053 3.912 3.780 14 10.563 9.899 9.295 8.745 8.244 7.786 7367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 11.652 10.838 10.106 9.447 8.851 8.313 7824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 4.608 4.419 4.243 4.080 3.928 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 20 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 21 14.029 12.821 11.764 10.836 10.017 9.292 8.649 8.075 7562 7102 6.687 6.312 5.9735.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121 3.963 14.451 13.163 12.042 11.061 10.201 9.442 8.772 8.176 7.645 7170 6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 14.857 13.489 12.303 11.272 10.371 9.580 8.883 8.266 7.718 7.230 6.792 6.399 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 24 15.247 13.799 12.550 11.469 10.529 9.707 8.985 8.348 7.784 7.283 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4.713 4.507 4.318 4.143 3.981 15.622 14.094 12.783 11.654 10.675 9.8239.077 8.422 7.843 7.330 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 15.983 14.375 13.003 11.826 10.810 9.929 9.161 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151 3.988 16.330 14.643 13.211 11.987 10.935 10.027 9.237 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4.734 4.524 4.332 4.154 3.990 28 16.663 14.898 13.406 12.137 11.051 10.116 9.307 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992 16.984 15.141 13.591 12.278 11.158 10.198 9.370 8.650 8.022 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975 4.743 4.531 4.337 4.159 3.994 30 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.694 8.055 7.496 7003 6.566 6.177 5.829 5.517 5.235 4.979 4.746 4.534 4.339 4.160 3.995 40 19.793 17159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7105 6.642 6.233 5.871 5.548 5.258 4.997 4.760 4.544 4.347 4.166 3.999 17
