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 19% 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) | $ 180,000 | $ 390,000 |
| Annual revenues and costs: | | |
| Sales revenues | $ 270,000 | $ 360,000 |
| Variable expenses | $ 130,000 | $ 180,000 |
| Depreciation expense | $ 44,000 | $ 86,000 |
| Fixed out-of-pocket operating costs | $ 80,000 | $ 60,000 |
The companys discount rate is 16%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
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?
Problem 14-23 (Algo) Comprehensive Problem (LO14-1, LO14-2, LO14-3, LO14-5, LO14-6) 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 division's return on investment (ROI), which has exceeded 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $ 180,000 $ 390,eee Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 270,00 $ 130,00 $ 44,00 $ 80,000 $360,000 $ 180, eee $ 86,000 $ 60, eee The company's discount rate is 16%. Click here to view Exhibit 148-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. 4. Calculate the profitability Index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, Identify whether Product A or Product B is preferred. 6b. Based on the simple rate of retum, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period 4.50 years 2.60 years Regs Req 2 > Complete this question by entering your answers in the tabs below. Reg 1 Req 2 Reg 3 Reg 4 Reg 5 Reg SA Req 6B Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B Net present values 31 $ Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Req 6A Reg 6B 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%) Product A Product B Internal rate of return 96 96 66. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Req 6B Calculate the profitability index for each product. (Round your answers to 2 decimal places.) Product Product B Profitability index Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B 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 %6 % Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B For each measure, identify whether Product A or Product B is preferred. Net Present Profitability Value Index Payback Period Internal Rate Simple Rate of of Return Return 60. Based on the simple rate of return, which of the two products should Lou's division accept? Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Req3 Req 4 Reg 5 Reg 6A Reg 6B Based on the simple rate of return, which of the two products should Lou's division accept? Accept Product A Accept Product B Reject both products
