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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 25% 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) | $ | 330,000 | $ | 525,000 | |
Annual revenues and costs: | |||||
Sales revenues | $ | 380,000 | $ | 480,000 | |
Variable expenses | $ | 172,000 | $ | 222,000 | |
Depreciation expense | $ | 66,000 | $ | 105,000 | |
Fixed out-of-pocket operating costs | $ | 83,000 | $ | 63,000 | |
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The companys discount rate is 17%. 1) Calculate the payback period for each product. (Round your answers to 2 decimal places.) 2) Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).) 3) Calculate the project profitability index for each product. (Use the appropriate table to determine the discount factor(s). 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% and use the appropriate table to determine the discount factor(s).)
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