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 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 $ 52,000 $ 94,000 Fixed out-of-pocket operating costs $ 76,000 $ 56,000 The companys discount rate is 18%. 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 Please Answer all or don't attempt.
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