Question

Product A Product B $190,000 $400,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $270,000 $370,000 $128,000 $178,000 $ 38,000 $ 80,000 $ 72,000 $ 52,000 The company's discount rate is 17%. Click here to view Exhibit 13B-1 and Exhibit 13B-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: Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 Req3 Reg 4 Req 5 Reg 6 Reg 6B Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years years

Answer 1

Product A Product B Initial investmnet 190000 400000 Sales Revneue 270000 370000 Variable Expenses 128000 178000 Depreciation Expenses 38000 80000 Fixed Out-of-Pocket operating cost 720001 52000 Annual income 32000 60000 Calcualtion of Annual Cash flows Sales Revenue 270000 370000 Less : Varaible Expeses 128000 178000 Fixed Out of Pocket cost 72000 52000 Annual Cash Flows 70000 140000 Payback Period Payback Period = Investment / Annual Cash flows Product A Product B Payback Period = (190000/70000), 2.71 2.86 (400000/140000) Net Present Value Product A Product B Annual Cash Flows (ACF) 70000 140000 Discounting Rate 17% 17% PVA $1 at 17% for 5 Year 3.199 3.199 Present Value of Cash flows =(PVA* ACF) 223930 447860 Less : investment 190000 400000 Net Present Value 33930 47860

Internal Rate of Return Product A Investment 190000 Annual Cash Flows (ACF) 70000 PVA AT IRR = ( investment / ACF) 2.714 Discounting Rate for 5Years 24.6% OR 25% Profitability Index Product A Net Present Value 33930 Investment 190000 Profitability index =Net Present Value / 0.18 Investment Product B 400000 140000 2.857 22.1% 22% Product B 47860 400000 0.12 Simple Rate of Return Product A annual Income 32000 Investment 190000 ARR ( Annual income / Investment) 16.8% Product B 60000 400000 15.0% For Each measure Identify whether Product a or Product b Is Preferred Profitability Index Product A Net Present Value Product B Internal Rate of Return Product A Payback Period Product A Simple Rate of Return Product A Based on Simple Rate of Return : Reject Both Products