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 18% 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)	$	170,000		$	380,000
Annual revenues and costs:
Sales revenues	$	250,000		$	350,000
Variable expenses	$	120,000		$	170,000
Depreciation expense	$	34,000		$	76,000
Fixed out-of-pocket operating costs	$	70,000		$	50,000

The companys discount rate is 16%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.

4. Calculate the profitability index for each product.