Solution 1:
Computation of Annual cash inflows | ||
Particulars | Product A | Product B |
Sales revenue | $3,30,000.00 | $4,30,000.00 |
Variable expenses | $1,52,000.00 | $2,02,000.00 |
Fixed Out of pocket operating cost | $78,000.00 | $60,000.00 |
Annual cash inflows | $1,00,000.00 | $1,68,000.00 |
Payback period | ||||||
Particulars | Choose Numerator | / | Choose Denominator | = | Payback Period | |
Initial Investment | / | Annual Cash inflows | = | Payback Period | ||
Product A | $2,80,000.00 | / | $1,00,000.00 | = | 2.80 | Years |
Product B | $4,80,000.00 | / | $1,68,000.00 | = | 2.86 | Years |
Solution 2:
Computation of NPV | ||||||
Product A | Product B | |||||
Particulars | Period | PV Factor (14%) | Amount | Present Value | Amount | Present Value |
Cash outflows: | ||||||
Initial investment | 0 | 1 | $2,80,000 | $2,80,000 | $4,80,000 | $4,80,000 |
Present Value of Cash outflows (A) | $2,80,000 | $4,80,000 | ||||
Cash Inflows | ||||||
Annual cash inflows | 1-5 | 3.433 | $1,00,000 | $3,43,300 | $1,68,000 | $5,76,744 |
Present Value of Cash Inflows (B) | $3,43,300 | $5,76,744 | ||||
Net Present Value (NPV) (B-A) | $63,300 | $96,744 |
Solution 3:
Computation of IRR | ||||
Project A | Project B | |||
Period | Cash flows | IRR | Cash flows | IRR |
0 | -$2,80,000.00 | 23.1% | -$4,80,000.00 | 22.1% |
1 | $1,00,000.00 | $1,68,000.00 | ||
2 | $1,00,000.00 | $1,68,000.00 | ||
3 | $1,00,000.00 | $1,68,000.00 | ||
4 | $1,00,000.00 | $1,68,000.00 | ||
5 | $1,00,000.00 | $1,68,000.00 |
Solution 4:
Computation of Profitability Index | ||
Particulars | Product A | Product B |
Present value of cash inflows | $3,43,300 | $5,76,744 |
Initial investment | $2,80,000 | $4,80,000 |
Profitability Index (PV of cash inflows / Initial investment) | 1.23 | 1.20 |
Solution 5:
Computation of Annual Operating income | ||
Particulars | Product A | Product B |
Annual cash inflows | $1,00,000.00 | $1,68,000.00 |
Less: depreciation | $56,000.00 | $96,000.00 |
Annual operating income | $44,000.00 | $72,000.00 |
Simple rate of return | |||||
Particulars | Choose Numerator | / | Choose Denominator | = | Simple rate of return |
Annual operating income | / | Initial investment | = | Simple rate of return | |
Product A | $44,000.00 | / | $2,80,000.00 | = | 15.7% |
Product B | $72,000.00 | / | $4,80,000.00 | = | 15.0% |
Solution 6a:
Product Preference | |
Payback Period | Product A |
Net Present Value | Product B |
Profitability index | 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 of two new products for a five- year period. His annual pay raises are determined by his division'...
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:...
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 25% 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 $ 525,000Annual revenues and costs:Sales revenues $ 380,000$ 480,000Variable expenses$ 172,00$ 225,000Depreciation expense $...
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...
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 25% 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 $ 525,000 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 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 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...