In: Accounting
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 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) | $ | 280,000 | $ | 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 company’s 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 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.
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
|
Complete this question by entering your answers in the tabs below.
Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)
|
Complete this question by entering your answers in the tabs below.
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%.)
|
Complete this question by entering your answers in the tabs below.
Calculate the project profitability index for each product. (Round your answers to 2 decimal places.)
|
Complete this question by entering your answers in the tabs below.
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%.)
|
Complete this question by entering your answers in the tabs below.
For each measure, identify whether Product A or Product B is preferred.
|
6B?????