Question

In: Finance

Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...

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

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.)

Product A

Product B

Payback period

2.89

years

2.94

years

2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)

Product A

Product B

Net present value

$21,445

$30,347

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.)

Product A

Product B

Internal rate of return

%

%


4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)

Product A

Product B

Project profitability index

Please help with #'s 3 & 4.  

Solutions

Expert Solution

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