Question
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: |
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Cost of equipment (zero salvage value) | $ | 340,000 |
| $ | 540,000 |
Annual revenues and costs: |
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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 |
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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.) |
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4. | Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) |
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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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