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 23% 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)	$	280,000		$	490,000
Annual revenues and costs:
Sales revenues	$	340,000		$	440,000
Variable expenses	$	156,000		$	206,000
Depreciation expense	$	56,000		$	98,000
Fixed out-of-pocket operating costs	$	79,000		$	59,000

The companys discount rate is 15%.

Use Excel or a financial calculator to solve any time value of money problems.

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 answers to the nearest dollar.)

	Product A	Product B
Net present value

3- Calculate the project profitability index for each product. (Round your answers to 2 decimal places.)

	Product A	Product B
Project profitability index

4- 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		%		%

5- For each measure, identify whether Product A or Product B is preferred.

Net Present Value	Profitability Index	Payback Period

5b.

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

	Accept Product A
	Accept Product B
	Reject both products