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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 22% 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)

$

340,000

$

540,000

Annual revenues and costs:

Sales revenues

$

380,000

$

460,000

Variable expenses

$

174,000

$

206,000

Depreciation expense

$

50,000

$

92,000

Fixed out-of-pocket operating costs

$

86,000

$

66,000

The companys discount rate is 20%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Required:

2.

Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)

4.

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

5.

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%.)

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