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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
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) | $ | 260,000 | $ | 470,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 310,000 | $ | 410,000 | |
Variable expenses | $ | 144,000 | $ | 194,000 | |
Depreciation expense | $ | 40,000 | $ | 82,000 | |
Fixed out-of-pocket operating costs | $ | 76,000 | $ | 58,000 | |
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The companys discount rate is 18%. |
1 Calculate the payback period for each product. (Round your answers to 2 decimal places. Product A Product B Payback Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Net present 3. Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place. e. 0.1234 should be considered as 12.3% and Round discount factor(s) to 3 decimal places.) Product Product internal rate of 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) Project profitability index 5. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. e. 0.1234 should be considered as 12.3%.) Simple rate of 6a. For each measure, identify whether Product A or Product B is prefered. Present Index Payback Rate of Period Retu
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