Solution 1:
Computation of Annual cash inflows | ||
Particulars | Product A | Product B |
Sales revenue | $280,000.00 | $380,000.00 |
Variable expenses | $132,000.00 | $182,000.00 |
Fixed Out of pocket operating cost | $73,000.00 | $53,000.00 |
Annual cash inflows | $75,000.00 | $145,000.00 |
Payback period | ||||||
Particulars | Choose Numerator | / | Choose Denominator | = | Payback Period | |
Initial Investment | / | Annual Cash inflows | = | Payback Period | ||
Product A | $200,000.00 | / | $75,000.00 | = | 2.67 | Years |
Product B | $410,000.00 | / | $145,000.00 | = | 2.83 | Years |
Solution 2:
Computation of NPV | ||||||
Product A | Product B | |||||
Particulars | Period | PV Factor | Amount | Present Value | Amount | Present Value |
Cash outflows: | ||||||
Initial investment | 0 | 1 | $200,000 | $200,000 | $410,000 | $410,000 |
Present Value of Cash outflows (A) | $200,000 | $410,000 | ||||
Cash Inflows | ||||||
Annual cash inflows | 1-5 | 3.127 | $75,000 | $234,525 | $145,000 | $453,415 |
Present Value of Cash Inflows (B) | $234,525 | $453,415 | ||||
Net Present Value (NPV) (B-A) | $34,525 | $43,415 |
Solution 3:
Computation of Profitability Index | ||
Particulars | Product A | Product B |
NPV | $34,525 | $43,415 |
Initial investment | $200,000 | $410,000 |
Profitability Index (PV of cash inflows / Initial investment) | 0.17 | 0.11 |
Solution 4:
Computation of Annual Operating income | ||
Particulars | Product A | Product B |
Annual cash inflows | $75,000.00 | $145,000.00 |
Less: depreciation | $40,000.00 | $82,000.00 |
Annual operating income | $35,000.00 | $63,000.00 |
Simple rate of return | |||||
Particulars | Choose Numerator | / | Choose Denominator | = | Simple rate of return |
Annual operating income | / | Initial investment | = | Simple rate of return | |
Product A | $35,000.00 | / | $200,000.00 | = | 17.5% |
Product B | $63,000.00 | / | $410,000.00 | = | 15.4% |
Solution 5a:
Product Preference | |
Payback Period | Product A |
Net Present Value | Product B |
Profitability index | Product A |
Simple rate of return | Product A |
Solution 5b:
Based on simple rate of return, lou barlow would likely to reject both the products as it will decrease overall ROI of the division.
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one...
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 $340,000 $540,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales 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 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) $360,000 530,000 Annual revenues and costs: $ 510,000...
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 Product B S380,000 $575.000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and cuests: Sales 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 $ 310,000 $ 510,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs:...
human res 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 5390,000 $585,000 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 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 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 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 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 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 20% 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) $ 250,000 $ 460,000 Annual revenues and costs:...