Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five- vear period. His annual pay raises are determined by his division's return on investment (ROI). which has exceeded 21% each of the ast 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 $ 210,000 $ 420, 000 $ 290,000 $ 138,000 $ 42,000 $ 74,000 $ 390, 000 $ 186,000 $ 84, 000 $ 54, 000 The company's discount rate is 19%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. Requlred: 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. 5a. For each measure, identify whether Product A or Product B is preferred.
Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five- vear period. His annual pay raises are determined by his division's return on investment (ROI). which has exceeded 21% each of the ast 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 $ 210,000 $ 420, 000 $ 290,000 $ 138,000 $ 42,000 $ 74,000 $ 390, 000 $ 186,000 $ 84, 000 $ 54, 000 The company's discount rate is 19%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. Requlred: 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. 5a. For each measure, identify whether Product A or Product B is preferred.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
$ 210,000
$ 420,000
$ 290,000
$ 138,000
$ 42,000
$ 74,000
$ 390, 080
$ 186,000
$ 84,000
$ 54,000
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
The company's discount rate is 19%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables.
Requlred:
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.
Req 1
Req 2
Req 3
Req 4
Reg 5
Req 6A
Req 68
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Product A
Product B
Payback period
years
years
< Req 1
Req 2 >
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