In: Finance
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 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Product A |
Product B |
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Initial investment: |
|||||
Cost of equipment (zero salvage value) |
$ |
260,000 |
$ |
470,000 |
|
Annual revenues and costs: |
|||||
Sales revenues |
$ |
310,000 |
$ |
410,000 |
|
Variable expenses |
$ |
144,000 |
$ |
194,000 |
|
Depreciation expense |
$ |
52,000 |
$ |
94,000 |
|
Fixed out-of-pocket operating costs |
$ |
76,000 |
$ |
56,000 |
|
The company’s discount rate is 18%.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.
Required:
1. Calculate the payback period for each product. (Round your answers to 2 decimal places.)
|
2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)
|
3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)
|
4. Calculate the project profitability index for each product.
(Round discount factor(s) to 3 decimal places. Round your
answers to 2 decimal places.)
|
Please help with #'s 3 & 4.
SEE IMAGE
Go through it, Any doubts, please feel free to ask, Give positive feedback, Thank you