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 17% 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)	$	180,000		$	390,000
Annual revenues and costs:
Sales revenues	$	260,000		$	360,000
Variable expenses	$	124,000		$	174,000
Depreciation expense	$	36,000		$	78,000
Fixed out-of-pocket operating costs	$	71,000		$	51,000

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.)

2.	Calculate the net present value for each product. (Round answers to the nearest dollar.)

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

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%.)

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

5b.

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

	Accept Product A
	Accept Product B
	Reject both products

Product A Product B Payback period years Product A Product B Net present value Product A Product B Project profitability index Product A Product B Simple rate of return 70 70 Net Present Profitability Payback Period Value Index