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 $23\%$ each of the last three years. He has computed the cost and revenue estimates for each product as follows:

Initial Investment:

Cost of equipment $($zero salvage value$)$: Product A: $$290,000$ Product B: $$490,000$

Annual Revenues and costs:

Sales Revenues: Product A $-$ $$340,000$ Product B $-$ $$440,000$

Variable expenses: Product A $-154,000$ Product B $-$ $$206,000$

Depreciation Expense: Product A $-$ $$58,000$ Product B $-$ $$98,000$

Fixed out$-$of$-$pocket operating costs: Product A $-$ $$79,000$ Product B $-$ $$59,000$

The company$$s discount rate is $15\%.$

Use Exhibit $14$B$-1$ and Exhibit $14$B$-2$ 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.

$6$a$.$ For each measure, identify whether Product A or Product B is preferred.

$6$b$.$ Based on the simple rate of return, which of the two products should Lou$$s division accept?

EXHIBIT $14$B$-1$

Present Value of $$1$;$\frac{1}{(1+r{)}^n}$

EXHIBIT $14$B$-2$

Present Value of an Annuity of $$1$ in Arrears; $\frac{1}{r}[1-\frac{1}{(1+r{)}^n}]$