Problem 13-23 Comprehensive Problem [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6]

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 24% 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)	$	330,000		$	515,000
Annual revenues and costs:
Sales revenues	$	370,000		$	470,000
Variable expenses	$	168,000		$	218,000
Depreciation expense	$	66,000		$	103,000
Fixed out-of-pocket operating costs	$	82,000		$	68,000

The companys discount rate is 15%.

Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Required:

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

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

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

	Product A		Product B
Simple rate of return		%		%

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

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return	Simple Rate of Return