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 20% 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)	$	250,000		$	460,000
Annual revenues and costs:
Sales revenues	$	300,000		$	400,000
Variable expenses	$	135,000		$	190,000
Depreciation expense	$	50,000		$	92,000
Fixed out-of-pocket operating costs	$	75,000		$	55,000

The companys discount rate is 18%.

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 in years.

2. Calculate the net present value for each product.

3. Calculate the internal rate of return for each product. %

4. Calculate the project 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.

Net present value / Profitability index / Payback period / Internal Rate of return / Simple Rate of return

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

Accept product a?

Accept product B?

Or reject both products?