Problem 12-23 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 division's return on investment (ROI), which has exceeded 19% 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) Annual revenues and costs: $ 400,000 190,000 $ 270,000 Sales revenues Variable expenses 370,000 178,000 $ 80,000 $ 52,000 128,000 $38,000 Depreciation expense Fixed out-of-pocket operating costs 72,000 The company's discount rate is 17% 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 project 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, Lou Barlow would likely Complete this question by entering your answers in the tabs below. Req 1 Reg 5 Req 2 Req 3 Req 4 Req 6A Req 6B Complete this question by entering your answers in the tabs below. Req 1 Req 4 Req 5 Req 2 Req 3 Req 6A Req 6B 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 Req 1 Req 3 Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 5 Req 6A Req 6B Req 4 Calculate the internal rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Internal rate of return % Req 2 Req 4 Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 5 Req 6B Req 4 Req 6A Calculate the project profitability index for each product. (Round your answers to 2 decimal places.) Product A Product B Project profitability index Req 3 Req 5 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 Calculate the simple rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Simple rate of return % % Req 4 Req 6A Complete this question by entering your answers in the tabs below. Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Req 1 For each measure, identify whether Product A or Product B is preferred. Payback Period Profitability Index Net Present Internal Rate Simple Rate of of Return Value Return Req 5 Req 6B
