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:

Initial investment:
Cost of equipment (zero salvage value)	$ 277,400	$ 480,000
Annual revenues and costs:
Sales revenues	$ 330,000	$ 430,000
Variable expenses	$ 152,000	$ 202,000
Depreciation expense	$ 56,000	$ 96,000
Fixed out-of-pocket operating costs	$ 78,000	$ 60,000

The companys discount rate is 14%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables.

Required:

1. Calculate the payback period for each product.

	Product A		Product B
Payback period		years		years

2. Calculate the net present value for each product.

	Product A	Product B
Net present value

3. Calculate the internal rate of return for each product.

	Product A		Product B
Internal rate of return		%		%

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

	Product A	Product B
Profitability index

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

Calculate the simple rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A		Product B
Simple rate of return		%		%

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

6b. Based on the simple rate of return, which of the two products should Lous division accept?