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:

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

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

	Product A Product B Payback period years years

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.)

	Product A Product B Net present value

• Req 1
• Req 3

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

• Calculate the internal rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

  	Product A Product B Internal rate of return % %

• Req 2
• Req 4

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

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

  	Product A Product B Project profitability index

• Req 3
• Req 5

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

• Calculate the simple rate of return for each product. (Round your answer to 1 decimal place i.e. 0.123 should be considered as 12.3%.)

  	Product A Product B Simple rate of return % %

• Req 4
• Req 6A

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

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

  	Net Present Value Profitability Index Payback Period Internal Rate of Return Simple Rate of Return

• Req 5
• Req 6B

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• Req 1
• Req 2
• Req 3
• Req 4
• Req 5
• Req 6A
• Req 6B

• Based on the simple rate of return, Lou Barlow would likely:

  	Accept Product Aradio button unchecked1 of 3 Accept Product Bradio button unchecked2 of 3 Reject both productsradio button unchecked3 of 3

• Req 6A
• Req 6B

Answer 1

iin PacductA vaiable expense Anual canh flouos Sleevenue -fcd aut fpket opabig caak 86000 38ga00 40,000 1a4000 Tnitial Fnvafment 340,000 340,000 124000 Poybach prted Annual cah flouos 206000 66000 460,000 188000 Tial vefment 54 0,000 540,000 yband prid .8 yeoys 88000 Phoduct A Produc B Bydnch pantad .ya 8 eas

Pgano Net prent value Pduct Pront value ofcah outfloaos340/c00 1-r+30%)5 reaent valuefcak lown 1a4000 x = Q4000 x a.991 n5 390884 340884 340,000 $ 30884 NPV Produet Present value fcanh oudflocos 540,000 1-(+20y.J eent value of cash fn Plocon 88000 (88000 x a.99) 568308 NP V 56 308 540,000 aa308 Preduct AductB Ne present value 30884 a2308

Poriodreut A coskfloausud casht loans -540/000 - 340,00 O 14000 188000 188000 24000 188000 104000 104000 4 188000 184000 88000 IRR &4 06 &86 Preduct A Rrocuct B এR 406 &1.86 Bestlalityd Present value of cash inflaus Preducd A tabil ndes initial fnvedmot 30884 340,000 09 Pro dud B, Pottaslt fndex 56 0308 540,000

NO Preduct Aroduct B Pehelabelity inckz 109 5Simple etate en Predut A Annual operating ncome Simple ale of oetaon itial nvesfnent 3400068000 340,000 56.44 reduct B 188000 (08000 Stmple ode eшлn 540,000 296000 540,000 54.81/ Product B Rroduct A Siple ae retonn 56.4 54.81

NO (5 ummm oduct pberene Teydach periad Neb preaent value oduct A Poduct A PreductA TRR Proditabilindex Reducb A Simple ade of retannRoduct A 9.9 barloas coould ike to ojec the booth Loas bot product ilen than as vetnffened prodeh RO the divinion based on Cwoent 5 ohichin etnn the mple