Solutions:
Solution 1: | ||||||
Computation of Annual cash inflows | ||||||
Particulars | Product A | Product B | ||||
Sales revenue | $3,50,000 | $4,50,000 | ||||
Variable expenses | $1,60,000 | $2,10,000 | ||||
Fixed Out of pocket operating cost | $80,000 | $61,000 | ||||
Annual cash inflows | $1,10,000 | $1,79,000 | ||||
Payback period | ||||||
Particulars | Choose Numerator | / | Choose Denominator | = | Payback Period | |
Initial Investment | / | Annual Cash inflows | = | Payback Period | ||
Product A | $3,00,000 | / | $1,10,000 | = | 2.73 | Years |
Product B | $5,00,000 | / | $1,79,000 | = | 2.79 | Years |
Solution 2: | ||||||
Computation of NPV | ||||||
Product A | Product B | |||||
Particulars | Period | PV Factor (16%) | Amount | Present Value | Amount | Present Value |
Cash outflows: | ||||||
Initial investment | 0 | 1 | $3,00,000 | $3,00,000 | $5,00,000 | $5,00,000 |
Present Value of Cash outflows (A) | $3,00,000 | $5,00,000 | ||||
Cash Inflows | ||||||
Annual cash inflows | 1-5 | 3.274 | $1,10,000 | $3,60,140 | $1,79,000 | $5,86,046 |
Present Value of Cash Inflows (B) | $3,60,140 | $5,86,046 | ||||
Net Present Value (NPV) (B-A) | $60,140 | $86,046 | ||||
Solution 3: | ||||||
Computation of IRR | ||||||
Project A | Project B | |||||
Period | Cash flows | IRR | Cash flows | IRR | ||
0 | -$3,00,000 | 24.3% | -$5,00,000 | 23.2% | ||
1 | $1,10,000 | $1,79,000 | ||||
2 | $1,10,000 | $1,79,000 | ||||
3 | $1,10,000 | $1,79,000 | ||||
4 | $1,10,000 | $1,79,000 | ||||
5 | $1,10,000 | $1,79,000 | ||||
Solution 4: | ||||||
Computation of Profitability Index | ||||||
Particulars | Product A | Product B | ||||
Net present value | $60,140 | $86,046 | ||||
Initial investment | $3,00,000 | $5,00,000 | ||||
Profitability Index (PV of cash inflows / Initial investment) | 0.20 | 0.17 | ||||
Solution 5: | ||||||
Computation of Annual Operating income | ||||||
Particulars | Product A | Product B | ||||
Annual cash inflows | $1,10,000 | $1,79,000 | ||||
Less: depreciation | $60,000 | $1,00,000 | ||||
Annual operating income | $50,000 | $79,000 | ||||
Simple rate of return | ||||||
Particulars | Choose Numerator | / | Choose Denominator | = | Simple rate of return | |
Annual operating income | / | Initial investment | = | Simple rate of return | ||
Product A | $50,000 | / | $3,00,000 | = | 16.7% | |
Product B | $79,000 | / | $5,00,000 | = | 15.8% | |
Solution 6a: | ||||||
Product Preference | ||||||
Net present Value | Product B | |||||
Profitability index | Product A | |||||
Payback Period | Product A | |||||
IRR | Product A | |||||
Simple rate of Return | Product A | |||||
Solution 6b: | ||||||
Based on Simple rate of return, Lou Barlow would likely reject both projects as their Simple rate of return is less than Division's ROI (23%). | ||||||
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 ralses are determined by his division's return on investment (RO), 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) Annual revenues and costs: Sales revenues...
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 $ 390,000 $ 585,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and...
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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $190,000 $400,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales...
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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $190,000 $400,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales...
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 Product B $ 290,000 $ 490,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs:...
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:...
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:...
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 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $ 170,000 $380,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs:...
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 $ 370,000 $ 570,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and...
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 E last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $ 390,000 $ 585,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues...