EXHILou 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 computed the following cost and revenue estimates for each product:

Product A Product B

Initial investment:

Cost of equipment $($zero salvage value$)$ $ $390,000$ $ $585,000$

Annual revenues and costs:

Sales revenues $ $420,000$ $ $500,000$

Variable expenses $ $185,000$ $ $222,000$

Depreciation expense $ $78,000$ $ $117,000$

Fixed out$-$of$-$pocket operating costs $ $90,000$ $ $70,000$

The company$$s discount rate is $21\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

$1.$ Calculate each product$$s payback period.

$2.$ Calculate each product$$s net present value.

$3.$ Calculate each product$$s internal rate of return.

$4.$ Calculate each product$$s profitability index.

$5.$ Calculate each product$$s simple rate of return.

$6$a$.$ For each measure, identify whether Product A or Product B is preferred.

$6$b$.$ Based on the simple rate of return, which of the two products should Lou$$s division accept?BIT $14$B$-2$

Present Value of an Annuity of $$1$ in Arrears; $\frac{1}{r}[1-\frac{1}{(1+r{)}^n}]$

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