Problem $12-23($Algo$)$ Comprehensive Problem $[$LO$12-1,$ LO$12-2,$ LO$12-3,$ LO$12-5,$ LO$12-6]$

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 division$$s 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$)$ $ $336,900$ $ $540,000$

Annual revenues and costs:

Sales revenues $ $380,000$ $ $460,000$

Variable expenses $ $170,000$ $ $206,000$

Depreciation expense $ $68,000$ $ $108,000$

Fixed out$-$of$-$pocket operating costs $ $86,000$ $ $66,000$

The company$$s discount rate is $20\%.$

Click here to view Exhibit $12$B$-1$ and Exhibit $12$B$-2,$ to determine the appropriate discount factor using tables.

Required:

$1.$ Calculate the payback period for each product.

$2.$ Calculate the net present value for each product.

$3.$ Calculate the internal rate of return for each product.

$4.$ Calculate the profitability index for each product.

$5.$ Calculate the simple rate of return for each product.

$6$a$.$ For each measure, identify whether Product A or Product B is preferred.

$6$b$.$ Based on the simple rate of return, which of the two products should Lou$$s division accept?