Question

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
Initial investment:
Cost of equipment (zero salvage value)	$	340,000		$	540,000
Annual revenues and costs:
Sales revenues	$	380,000		$	460,000
Variable expenses	$	170,000		$	206,000
Depreciation expense	$	68,000		$	108,000
Fixed out-of-pocket operating costs	$	86,000		$	66,000

The company’s discount rate is 20%.

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:

Answer 1

			Product A	Product B
1	Payback period	=	2.74	2.87
2	Net Present Value	=	$             30,884	$ 22,308
3	IRR	=	24.1%	21.9%
4	Profitability Index	=	1.09	1.04
5	Simple rate of return	=	16.5%	14.8%
6a	Net Present Value	Profitability Index	Payback period	IRR
	Product A	Product A	Product A	Product A
6b	Simple rate of return	=	Product A
	Workings:
	Product A:
2
		Year	Value Flows	Present Factor @20%	Present Value
	Initial Cost	0	$       -3,40,000	1	$              -3,40,000
	Cash Inflows ($380000-$170000-$86000)	1 - 5	$         1,24,000	2.991	$                3,70,884
	Net Present Value				$                   30,884
	Product B:
		Year	Value Flows	Present Factor @20%	Present Value
	Initial Cost	0	$       -5,40,000	1	$              -5,40,000
	Cash Inflows ($460000-$206000-$66000)	1 - 5	$         1,88,000	2.991	$                5,62,308
	Net Present Value				$                   22,308
1	Product A:
	Payback period	=	Initial investment / Annual net cash flows
		=	2.74	years
	Product B:
	Payback period	=	Initial investment / Annual net cash flows
		=	2.87	years
3	Computation of IRR
	Product A:
		Year	Value Flows
		0	$       -3,40,000
		1	$         1,24,000
		2	$         1,24,000
		3	$         1,24,000
		4	$         1,24,000
		5	$         1,24,000
	IRR	=	24.06%
		Formula	=IRR(I15:I20)
	Product B:
		Year	Value Flows
		0	$       -5,40,000
		1	$         1,88,000
		2	$         1,88,000
		3	$         1,88,000
		4	$         1,88,000
		5	$         1,88,000
	IRR	=	21.86%
		Formula	=IRR(I15:I20)
4	Product A:
	Profitability Index	=	1 + NPV/Initial Investment
			1 + $30884/ $340000
		=	1.09
	Product B:
	Profitability Index	=	1 + NPV/Initial Investment
			1 + $22308 / $540000
		=	1.04
ekkarill92 Next > < Previous Related Solutions 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 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) $ 390,000 $ 585,000 Annual revenues and costs:... 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 25% 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) $ 370,000 $ 530,000 Annual revenues and costs:... 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 21% 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) $ 210,000 $ 420,000 Annual revenues and costs:... 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 25% 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) $ 370,000 $ 530,000   Annual revenues and costs:... 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. 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) $ 340,000 $ 540,000 Annual revenues and costs: Sales revenues $ 380,000 $ 460,000 Variable expenses $ 170,000 $ 206,000 Depreciation expense $ 68,000 $ 108,000 Fixed out-of-pocket operating costs $... 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) $ 220,000 $ 410,000 Annual revenues and costs:... 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 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) $ 390,000 $ 585,000 Annual revenues and costs:... 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 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) $ 300,000 $ 500,000 Annual revenues and costs:... 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) $ 250,000 $ 460,000 Annual revenues and costs:... 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 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) $ 390,000 $ 585,000 Annual revenues and costs:... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions A 4-year annuity of eight $9,800 semiannual payments will begin 7 years from now, with the... Consider the following relation schema about project meetings: PMG(projID, title, type, manager, jobID, start-date, end-date, contractor,... Question 3 a) A coil consist of 2000 turns of copper wire having a cross sectional... A 66.5-kg person throws a 0.0500-kg snowball forward with a ground speed of 33.5 m/s. A... Use starUML to solve the problems.THX Problem Create a domain model for this system. Virtual Safari... You are the managing director of a credit card company. Every new sales agent in your... Marco Suarez is starting a new job in the Sales and Marketing Department of a financial... ADVERTISEMENT About @ 2020 WizEdu