Lou Barlow, adivisional manager for Sage Company, has an opportunity tomanufacture and sell one of two new products for a five-yearperiod. He has computed the cost and revenue estimates for eachproduct as follows:
| Product A | Product B |
| Initial investment: | | | | | |
| Cost of equipment (zero salvagevalue) | $ | 370,000 | | $ | 530,000 |
| Annual revenues and costs: | | | | | |
| Sales revenues | $ | 400,000 | | $ | 510,000 |
| Variable expenses | $ | 180,000 | | $ | 250,000 |
| Depreciation expense | $ | 74,000 | | $ | 106,000 |
| Fixed out-of-pocket operatingcosts | $ | 85,000 | | $ | 72,000 |
|
The company’s discountrate is 19%.
Ignore income taxes.Note that Excel or a financial calculator must be used to calculateitems 2 - 4.
Required:
1. Calculate thepayback period for each product.
2. Calculate the netpresent value for each product.
3. Calculate theinternal rate of return for each product.
4. Calculate theproject profitability index for each product.
6a. For each measure,identify whether Product A or Product B is preferred.
