Chapter 12 problem 1 (please help with 1, 5 and 6A). the rest I have figured out.
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) |
$ |
290,000 |
$ |
490,000 |
|
Annual revenues and costs: |
|||||
Sales revenues |
$ |
340,000 |
$ |
440,000 |
|
Variable expenses |
$ |
154,000 |
$ |
206,000 |
|
Depreciation expense |
$ |
58,000 |
$ |
98,000 |
|
Fixed out-of-pocket operating costs |
$ |
79,000 |
$ |
59,000 |
|
The company’s discount rate is 15%.
Required:
1. Calculate the payback period for each product.
2. done
3. done
4. done
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. done
1. Payback Period Calculation
A | B | ||
Initial Investment | 2,90,000 | 4,90,000 | |
Annual Revenue | |||
Sales Revenue | 340000 | 440000 | |
Variable Expenses | 154000 | 206000 | |
Depreciation Expenses | 58000 | 98000 | |
Fixed Out of pocket | 79000 | 59000 | |
Cash Flows | 1st Year | 49000 | 77000 |
2nd Year | 60270 | 94710 | |
3rd Year | 74132.1 | 116493.3 | |
4th Year | 91182.48 | 143286.8 | |
5th year | 112154.5 | 176242.7 |
Cummulative Cash Table | A | Cummulative Cash flow | B | Cummulative Cash flow |
1st Year | 49000 | 49000 | 77000 | 77000 |
2nd Year | 60270 | 109270 | 94710 | 171710 |
3rd Year | 74132.1 | 183402 | 116493 | 288203 |
4th Year | 91182.48 | 274585 | 143287 | 431490 |
5th year | 112154.5 | 386739.0371 | 176243 | 607733 |
Machine A
The Investment made in Machine A is $2,90,000
the amount repaid in 4 years is 274585
Pay Back Period = 4 years + (2,90,000 - 274585 ) / 112154 *12 = 4 years and 2 months
Machine B
The Investment made in Machine A is $4,90,000
the amount repaid in 4 years is 431490
Pay Back Period = 4 years + (4,90,000 - 431490 ) / 176242 *12 = 4 years and 4 months
5) Simple Rate of Return
Calculation simple rate of return | ||
Particulars: | Product A | Product B |
Sales revenues | $340,000 | $440,000 |
Less: Variable expenses | $154,000 | $206,000 |
Less: Depreciation expense | $58,000 | $98,000 |
Less: Fixed out-of-pocket operating costs | $79,000 | $59,000 |
Earnings before interest and taxes (A) | $49,000 | $77,000 |
Investment in Equipment (B) | $290,000 | $490,000 |
Rate of Return (A/B x 100) | 16.90% | 15.71% |
6a ) Product A is prefered as the payback period is 4 years and 2 months and the ROR is 16.90 % which is better than product B.
Chapter 12 problem 1 (please help with 1, 5 and 6A). the rest I have figured...
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) $ 290,000 $ 490,000 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 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 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 19% 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) $ 190,000 $ 400,000 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 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B $270,000 $480,000 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 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows: The company’s discount rate is 19%. 1. Calculate the payback period for each product. 2. Calculate the net present value...
ou 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) $ 370,000 $ 570,000 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 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) $ 280,000 $ 480,000 Annual revenues and costs:...