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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:

Initial Investment: Product A Product B

Cost of equipment (zero salvage value) $380,000 $575,000

Annual Revenues and Cost:

Sales Revenue $410,000 $490,000

Variable Expenses $186000 $218,000

Depreciation expense $76,000 $115,000

Fixed out-of-pocket operating costs $89,000 69,000

The company's discount rate is 20%.

Use Excel or a financial calculator to solve any time value of money problems.

Required:

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

Product A_________ Product B _________

2.Calculate the net present value for each product.(Round answers to the nearest dollar.)

Product A_________ Product B _________

3.Calculate the project profitability index for each product.(Round your answers to 2 decimal places.)

Product A_________ Product B _________

4.Calculate the simple rate of return for each product.(Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)

Product A_________ Product B _________

5a.For each measure, identify whether Product A or Product B is preferred.

Net Present Value _______ Profitability Index _______ Payback Period __________

5b.Based on the simple rate of return, Lou Barlow would likely:

1. Accept Product A
2. Accept Product B
3. Reject both products

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