Reference no: EM132514335

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:

                                                                        Product A       Product B

Initial investment:

Cost of equipment (zero salvage value)        $350,000         $550,000

Annual revenues and costs: Sales revenues   $390,000         $470,000

Variable expenses                                       $178,000             $210,000

Depreciation expense                                       $70,000            $110,000

Fixed out-of-pocket operating costs                  $87,000              $67,000

• The company's discount rate is 20%.
• Use Excel or a financial calculator to solve any time value of money problems.

Required:

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

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

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

Question 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%.)

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

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

Accept Product AAccept Product BReject both products