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 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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started