Problem 12-23 (Algo) Comprehensive Problem [LO12-1, LO12-2, LO12-3, LO12-5, LO12-6]

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 divisions return on investment (ROI), which has exceeded 23% 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)	$ 277,400	$ 480,000
Annual revenues and costs:
Sales revenues	$ 330,000	$ 430,000
Variable expenses	$ 152,000	$ 202,000
Depreciation expense	$ 56,000	$ 96,000
Fixed out-of-pocket operating costs	$ 78,000	$ 60,000

The companys discount rate is 14%.

Click here to view Exhibit 12B-1 and Exhibit 12B-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.

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

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

Complete this question by entering your answers in the tabs below.

• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

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

	Product A	Product B
Payback period	2.77	years	2.86	years

2. Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)

	Product A	Product B
Net present value		$96,744

3. Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A	Product B
Internal rate of return		%	22.2	%

4. Calculate the profitability index for each product. (Round your answers to 2 decimal places.)

	Product A	Product B
Profitability index

5. Calculate the simple rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

	Product A	Product B
Simple rate of return		%	15.0	%

answer 1-5