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)

$

370,000

$

570,000

Annual revenues and costs:

Sales revenues

$

400,000

$

480,000

Variable expenses

$

182,000

$

214,000

Depreciation expense

$

74,000

$

114,000

Fixed out-of-pocket operating costs

$

88,000

$

68,000

The companys discount rate is 20%.

1.	Calculate the payback period for each product. (Round your answers to 2 decimal places.)

	Product A		Product B
Payback period		years		years
	sheet is drawn here

2.	Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).)

	Product A	Product B
Net present value
	sheet is drawn here

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.)

	Product A	Product B
Project profitability index
	sheet is drawn here

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).)

	Product A		Product B
Simple rate of return		%		%
	sheet is drawn here

5a.	For each measure, identify whether Product A or Product B is preferred.

Net Present Value	Profitability Index	Payback Period
sheet is drawn here

5b.

Based on the simple rate of return, Lou Barlow would likely:

	Accept Product A
	Accept Product B
	Reject both products