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 25% 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) $ 370,000 $ 530,000

Annual revenues and costs:

Sales revenues $ 400,000 $ 510,000

Variable expenses $ 180,000 $ 250,000

Depreciation expense $ 49,000 $ 91,000

Fixed out-of-pocket operating costs $ 85,000 $ 72,000

The companys discount rate is 19%.

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 2.74 Years 2.82 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 $42,776 $44,829

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 24.1% 22.5 %

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

Project profitability index 1.12 1.08

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 Presnt Value Profitability Index 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