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 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) $ 200,000 $ 410,000 Annual revenues and costs: Sales revenues $ 280,000 $ 380,000 Variable expenses $ 132,000 $ 182,000 Depreciation expense $ 40,000 $ 82,000 Fixed out-of-pocket operating costs $ 73,000 $ 53,000 The company’s discount rate is 18%. Use Excel or a financial calculator to solve any time value of money problems. 1. Calculate the payback period for each product 2. Calculate the net present value for each product. 3. Calculate the project profitability index for each product. 4. Calculate the simple rate of return for each product. For each measure, identify whether Product A or Product B is preferred.

Calculate the payback period for each product. (Round your answers to 2 decimal places.)

     

2.	Calculate the net present value for each product. (Round answers to the nearest dollar.)

     

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

     

4.	Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

     

5a.	For each measure, identify whether Product A or Product B is preferred.

Answer 1