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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 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: Sales revenues $ 330,000 $ 430,000 $ 152,000 $ 202,000 Fixed out-of-pocket operating costs $ 56,000 $ 78,000 $ 96,000 $ 60,000 Variable expenses Depreciation expense The company's discount rate is 14%. Click here to view Exhibit 14B-1 and Exhibit 14B-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? EXHIBIT 14B-1 Present Value of $1; 1(1+r) n Periods 4% 5% 6% 9% 1 0.962 2 0.925 3. 0.889 4 5 0.747 0.713 0.681 0.650 6 0.790 0.746 0.705 0.666 0.630 0.596 7 8 9 0.760 0.711 0.665 0.623 0.583 0.547 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.513 10 11 0.676 0.614 0.650 0.585 0.558 0.508 0.463 0.422 0.386 0.391 0.352 0.527 0.475 0.429 0.388 0.350 0.317 0.287 12 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 13 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 14 15 16 17 18 0.494 0.416 0.350 19 0.475 0.396 0.331 20 21 0.577 0.505 0.442 0.388 0.340 0.555 0.481 0.417 0.362 0.315 0.534 0.458 0.394 0.339 0.292 0.513 0.436 0.371 0.317 0.270 0.296 0.277 0.232 0.456 0.377 0.312 0.258 0.215 0.439 0.359 0.294 0.242 0.199 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.275 0.252 0.218 0.239 0.209 0.183 0.160 | 0.140 0.188 0.163 0.141 0.123 0.231 0.198 0.170 0.146 0.125 0.108 7% 8% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.952 0.943 0.935 0.926 0.917 0.909 | 0.901 | 0.893 0.885 0.877 0.870 0.862 0.855. 0.847 0.840 0.833 0.826 0.820 | 0.813 0.806 0.800 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 0.683 0.672 0.661 0.650 0.640 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 | 0.593 | 0.579 | 0.564 | 0.551 0.537 | 0.524 0.512 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 0.467 0.451 0.437 0.423 0.410 0.822 0.784 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 | 0.419 | 0.402 | 0.386 0.370 | 0.355 0.341 0.328 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.262 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0.191 0.179 0.168 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0.155 0.144 0.134 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 0.149 0.137 0.126 0.116 0.107 0.261 0.237 0.215 0.195 0.178 0.162 | 0.148 | 0.135 0.123 0.112 0.103 0.094 0.086 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 0.102 0.092 0.083 0.076 0.069 0.204 | 0.182 | 0.163 0.145 0.130 0.116 | 0.104 0.093 | 0.084 | 0.075 0.068 0.061 0.055 0.125 0.111 0.099 0.088 0.078 0.069 0.062 0.123 0.108 0.095 0.084 0.074 0.065 | 0.057 0.051 0.107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.034 0.055 0.049 0.044 0.045 0.040 0.035 0.036 0.032 0.028 0.093 0.080 0.069 0.250 0.212 0.180 0.153 0.130 0.111 22 0.422 0.342 0.278 0.226 0.184 23 0.406 0.326 24 0.390 0.310 25 0.375 0.295 0.233 26 27 0.194 0.164 0.138 0.178 0.149 0.124 0.164 0.135 0.112 0.150 0.123 0.101 0.262 0.211 0.170 0.138 0.112 0.091 0.247 0.197 0.158 0.126 0.102 0.082 0.184 0.146 | 0.116 0.092 0.074 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.347 0.268 0.207 0.161 0.125 0.098 0.076 0.060 0.116 0.098 28 29 30 40 0.333 0.255 0.196 0.150 0.116 0.090 0.069 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.308 0.231 0.174 0.208 0.142 0.097 0.054 0.131 0.099 0.067 | 0.046 0.052 | 0.045 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 0.014 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 | 0.018 | 0.015 | 0.013 0.011 0.009 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.007 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 | 0.006 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.005 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.004 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.047 | 0.037 0.029 0.023 0.018 0.014 0.011 | 0.009 | 0.007 0.006 | 0.005 0.004 0.003 0.002 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.048 0.037 0.029 0.022 0.017 0.014 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.002 0.075 0.057 0.044 0.033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0.004 0.003 0.003 0.002 0.002 0.001 0.032 0.022 0.015 0.011 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000 0.060 0.039 0.030 | 0.026 | 0.023 0.011. EXHIBIT 14B-2 Present Value of an Annuity of $1 in Arrears; 1 r [1-1(1+r)n] Periods 4% 5% 1 0.962 0.952 2 1.886 1.859 3 4 5 6 5.242 5.076 4.917 7 6.002 5.786 5.582 8 6.733 9 7.435 7.108 10 8.111 11 8.760 6.463 6.210 6.802 7.722 7.360 8.306 7.887 12 9.385 8.863 8.384 7.943 13 9.986 9.394 8.853 8.358 14 10.563 9.899 9.295 8.745 8.244 15 11.118 10.380 9.712 9.108 8.559 16 11.652 10.838 10.106 9.447 8.851 17 12.166 11.274 10.477 9.763 9.122 8.544 8.022 18 12.659 11.690 10.828 10.059 9.372 8.756 8.201 19 13.134 12.085 11.158 10.336 9.604 8.950 20 13.590 12.462 11.470 10.594 9.818 9.129 8.514 21 14.029 12.821 11.764 10.836 10.017 9.292 8.649 22 23 24 25 26 27 28 29 30 14.451 13.163 12.042 11.061 10.201 9.442 14.857 13.489 12.303 11.272 10.371 9.580 15.247 13.799 12.550 11.469 10.529 9.707 15.622 14.094 12.783 11.654 10.675 9.823 15.983 14.375 13.003 11.826 10.810 9.929 9.161 16.330 14.643 13.211 11.987 10.935 10.027 9.237 16.663 14.898 13.406 12.137 11.051 10.116 9.307 16.984 15.141 13.591 12.278 11.158 10.198 9.370 17.292 15.372 13.765 12.409 11.258 10.274 9.427 8.772 8.176 7.645 7.170 8.883 8.266 7.718 7.230 8.985 8.348 7.784 7.283 9.077 8.422 7.843 7.330 8.650 8.022 8.694 8.055 40 19.793 17.159 15.046 13.332 11.925 10.757 9.779 8.951 8.244 7.634 7.105 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 1.509 1.492 1.474 1.457 1.440 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 |2.174 | 2.140 2.106 2.074 2.042 2.011 1.981 1.952 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 2.540 2.494 2.448 2.404 2.362 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 2.926 2.864 2.803 2.745 2.689 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 3.245 3.167 3.092 3.020 2.951 5.389 5.206 5.033 4.868 4.712 4.564 | 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 3.508 3.416 3.327 3.242 3.161 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 3.726 3.619 3.518 3.421 3.329 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 3.905 3.786 3.673 3.566 3.463 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 4.054 3.923 3.799 3.682 3.571 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 4.177 4.035 3.902 3.776 3.656 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 4.278 4.127 3.985 3.851 3.725 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 4.362 4.203 4.053 3.912 3.780 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 4.432 4.265 4.108 3.962 3.824 8.061 7.606 7.191 6.811 6.462 6.142 5.847. 5.575 5.324 5.092 4.876 4.675 4.489 4.315 4.153 4.001 3.859 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 4.536 4.357 4.189 4.033 3.887 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 4.576 4.391 4.219 4.059 3.910 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 4.608 4.419 4.243 4.080 3.928 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 4.635 4.442 4.263 4.097 3.942 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 4.657 4.460 4.279 4.110 3.954 8.075 7.562 7.102 6.687 6.312 5.973 5.665 5.384 5.127 4.891 4.675 4.476 4.292 4.121 3.963 6.743 6.359 6.011 5.696 5.410 5.149 4.909 4.690 4.488 4.302 4.130 3.970 6.792 6.399. 6.044 5.723 5.432 5.167 4.925 4.703 4.499 4.311 4.137 3.976 6.835 6.434 6.073 5.746 5.451 5.182 4.937 4.713 4.507 4.318 4.143 3.981 6.873 6.464 6.097 5.766 5.467 5.195 4.948 4.721 4.514 4.323 4.147 3.985 8.488 7.896 7.372 6.906 6.491 6.118 5.783 5.480 5.206 4.956 4.728 4.520 4.328 4.151 3.988 8.548 7.943 7.409 6.935 6.514 6.136 5.798 5.492 5.215 4.964 4.734 | 4.524 4.332 4.154 3.990 8.602 7.984 7.441 6.961 6.534 6.152 5.810 5.502 5.223 4.970 4.739 4.528 4.335 4.157 3.992 7.470 6.983 6.551 6.166 5.820 5.510 5.229 4.975 4.743 4.531 7.496 7.003 6.566 6.177 5.829 5.517 5.235 4.979 4.746 4.534 6.642 6.233 5.871 5.548 5.258 4.997 4.760 | 4.544 4.337 4.159 3.994 4.339 4.160 3.995 4.347 4.166 3.999 Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the payback period for each product. (Round your answers to 2 decimal places.) Payback period Product A Product B years years Req 1 Req 2 > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the net present value for each product. (Round your final answers to the nearest whole dollar amount.) Product A Product B Net present value < Req 1 Req 3 > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Internal rate of return % % < Req 2 Req 4 > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the profitability index for each product. (Round your answers to 2 decimal places.) Profitability index Product A Product B < Req 3 Req 5 > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B Calculate the simple rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be considered as 12.3%.) Product A Product B Simple rate of return % % < Req 4 Req 6A > Complete this question by entering your answers in the tabs below. Req 1 Req 2 Req 3 Req 4 Req 5 Req 6A Req 6B For each measure, identify whether Product A or Product B is preferred. Net Present Value Internal Rate Simple Rate of Profitability Index Payback Period of Return Return < Req 5 Req 6B >

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