50.1K

Verified Solution

Link Copied!

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: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Product A 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. $ 298,850 $ 350,000 $ 160,000 $ 60,000 $ 80,000 Product B $ 500,000 $ 450,000 $ 210,000 $ 100,000 $ 61,000 The company's discount rate is 16%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. 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?

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: The company's discount rate is 16%. Click here to view Exhibit 128-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. EXHIBIT 12B-2 Present Value of an Annuity of $1 in Arrears; 1/r(1(1/(1+r)n)) (1+r)n1

Answer & Explanation Solved by verified expert

See Answer