Problem 14-23 (Algo) Comprehensive Problem [LO14-1, LO14-2, LO14-3, LO14-5, LO14-6] 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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $ 290,000 $ 490,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 340,000 $ 154,000 $ 58,000 $ 79,000 $ 440,000 $ 206,000 $ 98,000 $ 59,000 The company's discount rate is 15%. Click here to view Exhibit 14B-1 and Exhibit 14B-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 Lou's division accept? Complete this question by entering your answers in the tabs below. Req 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 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 Reg 2 Req3 Req 4 Req 5 Reg 6A Reg 6B 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 % % Req 1 Reg 2 Reg 3 Reg 4 Reg 5 Req 6A Reg 6B Calculate the profitability index for each product. (Round your answers to 2 decimal places.) Product A Product B Profitability index Reg 1 Reg 2 Req3 Reg 4 Reg 5 Reg 6A Reg 6B 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 Reg 1 Reg 2 Reg 3 Reg 4 Reg 5 Reg 6A Reg 6B For each measure, identify whether Product A or Product B is preferred. Net Present Value Profitability Index Payback Period Internal Rate Simple Rate of of Return Return Req 1 Reg 2 Req3 Req 4 Req 5 Reg 6A Reg 6B Based on the simple rate of return, which of the two products should Lou's division accept? Accept Product A Accept Product B Reject both products
