Problem 7-23 (Algo) Comprehensive Problem (L07-1, L07-2, L07-3, LO7-5, L07-6] 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 $ 340,000 $540,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 380,000 $ 170,000 $ 68,000 $ 86,000 $ 460,000 $206,000 $ 108,000 $ 66,000 The company's discount rate is 20%. Click here to view Exhibit 7B-1 and Exhibit 7B-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: Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A 2.80 years Product B 2.85 years Payback period Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B $ 23,875/ $ 27,263 Net present value Problem 7-23 (Algo) Comprehensive Problem (L07-1, L07-2, L07-3, LO7-5, L07-6] 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 $ 340,000 $540,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 380,000 $ 170,000 $ 68,000 $ 86,000 $ 460,000 $206,000 $ 108,000 $ 66,000 The company's discount rate is 20%. Click here to view Exhibit 7B-1 and Exhibit 7B-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: Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A 2.80 years Product B 2.85 years Payback period Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B $ 23,875/ $ 27,263 Net present value
