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 22% 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) | $ 346,800 | $ 550,000 |
Annual revenues and costs: | ||
Sales revenues | $ 390,000 | $ 470,000 |
Variable expenses | $ 178,000 | $ 210,000 |
Depreciation expense | $ 70,000 | $ 110,000 |
Fixed out-of-pocket operating costs | $ 87,000 | $ 67,000 |
The companys discount rate is 20%.
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.
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2. Calculate the net present value for each product.
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3. Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%
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4. Calculate the profitability index for each product. (Round your answers to 2 decimal places
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5. 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%.)
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6a.For each measure, identify whether Product A or Product B is preferred.
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