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) $300,000 $500,000

Annual revenues and costs:

Sales revenues $350,000 $450,000

Variable expenses $160,000 $210,000

Depreciation expense $44,000 $86,000

Fixed out-of-pocket operating costs $80,000 $61,000

The companys discount rate is 16%.

Click here to view Exhibit 13B-1 and Exhibit 13B-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.)

	Product A		Product B
Payback Period		Years		Years

2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)

	Product A	Product B
Net Present Value

3. Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and Round discount factor(s) to 3 decimal places.)

	Product A		Product B
Factor of the Internal Rate of Return		%		%

4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)

	Product A	Product B
Product Profitability Index

5. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 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.

Net Present Value	Profitability	Payback Period	Internal Rate of Return

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

_____ Accept Product A

_____ Accept Product B

_____ Reject both products