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)

$

380,000

$

575,000

Annual revenues and costs:

Sales revenues

$

410,000

$

490,000

Variable expenses

$

186,000

$

218,000

Depreciation expense

$

76,000

$

115,000

Fixed out-of-pocket operating costs

$

89,000

$

69,000

The companys discount rate is 20%.

Click here to view Exhibit 8B-1 and Exhibit 8B-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		years		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

3. Calculate the internal rate of return for each product. (Round percentage answers 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
Internal rate of return		%		%

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

5. Calculate the simple rate of return for each product. (Round percentage answers 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.

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

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return

	Accept Product A
	Accept Product B
	Reject both products