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Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell...

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Accounting

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 divisions 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

Initial investment:

Cost of equipment (zero salvage value) $ 173,660 $ 390,000

Annual revenues and costs:

Sales revenues $ 270,000 $ 360,000

Variable expenses $ 130,000 $ 180,000

Depreciation expense $ 44,000 $ 86,000

Fixed out-of-pocket operating costs $ 80,000 $ 60,000

The companys discount rate is 16%. Click here toview Exhibit 12B-1 and Exhibit 12B-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 Lous division accept?

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