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 18% each of thelast three years. He has computed the cost and revenue estimates for each product as follows:Product AProduct BInitial investment:Cost of equipment (zero salvage value)$ 170,000$ 380,000Annual revenues and costs:Sales revenues$ 250,000$ 350,000Variable expenses$ 120,000$ 170,000Depreciation expense$ 34,000$ 76,000Fixed out-of-pocket operating costs$ 70,000$ 50,000The company's discount rate is 16%.Click here to view Exhibit 7B-1 and Exhibit 7B-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 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, which of the two products should Lou's division accept?

Payback Period = is the period required to cover initial investment from the annual cash flowNPV is…

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 18% 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) $ 170,000 $ 380,000 Annual revenues and costs: Sales revenues $ 250,000 $ 350,000 $ 120,000 $ 170,000 $ 34,000 $ 76,000 Fixed out-of-pocket operating costs $ 70,000 $ 50,000 Variable expenses Depreciation expense The company's discount rate is 16%. Click here to view Exhibit 7B-1 and Exhibit 7B-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 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, which of the two products should Lou's division accept?

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 18P