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) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 340,000 $ 540,000 S 380,000 $170,000 $ $ 460,000 $ 206,000 $108,000 66,000 68,000 86,000 $ The company's discount rate is 20%. 13-02 Evaluate Click here to view Exhibit 13B-1 and Exhibit 13B-2, to detemrmine 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, Lu Barlow would likely: Complete this question by entering your answers in the tabs below. Req 68 Req 5 Req 6A Req 4 Req 3 Req 2 Req 1 Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product B Product A years years Payback period Req 2> Reo 1

Answer 1

	Product A	Product B
Sales Revenues	$        380,000.00	$       460,000.00
Less: Variable Expenses	$        170,000.00	$       206,000.00
Less: Fixed out-of-pocket operating costs	$          86,000.00	$         66,000.00
Annual Cash Flow	$        124,000.00	$       188,000.00

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

Payback period = Initial investment/Annual Cash Flow

	Product A	Product B
Initial Investment	$        340,000.00	$       540,000.00
Annual Cash Flow	$        124,000.00	$       188,000.00
Payback Period	2.74 years	2.87 years
	=340000/124000	=540000/188000

2.Calculate the net present value for each product.

Net present value = Annual Cash Flow*PVIFA(20%,5) - Initial investment +

	Product A	Product B
Annual Cash Inflow	$        124,000.00	$       188,000.00
PVIFA (20%,5)	2.9906	2.9906
Present Value of Cash Inflows	$        370,834.40	$       562,232.80
Less: Initial Investment	$        340,000.00	$       540,000.00
Net Present Value	$          30,834.40	$         22,232.80

3.Calculate the internal rate of return for each product.

Initial investment = Annual Cash Flow*PVIFA(rate,5)

Product A

340000 = 124000*PVIFA(rate,5years)

2.7419 = PVIFA (rate, 5)

2.7419355

IRR = 24%

Product B

540000 = 188000*PVIFA(rate,5years)

2.8723 = PVIFA (rate, 5)

2.8723404

IRR = 21.8%

4.Calculate the project profitability index for each product.

project profitability index for each product = 1 + NPV/Initial Invetsment

Product A

project profitability index for each product = 1 + NPV/Initial Invetsment

project profitability index for each product = 1+ 30834.40/340000

project profitability index for product A= 1.09

Product B

project profitability index for each product = 1 + NPV/Initial Invetsment

project profitability index for each product = 1+ 22232.80/540000

project profitability index for product B= 1.04

Note: Sometime Question ask net profitable index and answer shows wrong than you must subtract by 1

therefore net profitable index of product A = 0.09 and net profitable index of product B = 0.04

5.Calculate the simple rate of return for each product.

simple rate of return = Net Income/Average investment

	Product A	Product B
Sales Revenues	$        380,000.00	$       460,000.00
Less: Variable Expenses	$        170,000.00	$       206,000.00
Less: Fixed out-of-pocket operating costs	$          86,000.00	$         66,000.00
Less: Depreciation	$          68,000.00	$       108,000.00
Net Income	$          56,000.00	$         80,000.00
Average Investment	170000	270000
Average Investment =( Initial Investment + Salvage Value )/2
Simple Rate of Return	32.9%	29.6%
simple rate of return = Net Income/Average investment	=56000/170000	=80000/270000

6a. For each measure, identify whether Product A or Product B is preferred.

Net Present Value	Profitability Index	Payback Period	Internal Rate of Return
Product A	Product A	Product A	Product A

6b. Based on the simple rate of return, Lou Barlow would likely:

Accept Product A