Lou Barlow, a divisional manager for Sage Company, has anopportunity to manufacture and sell one of two new products for afive-year period. His annual pay raises are determined by hisdivision’s return on investment (ROI), which has exceeded 24% eachof the last three years. He has computed the cost and revenueestimates for each product as follows:
| Product A | Product B |
| Initial investment: | | | | | |
| Cost of equipment (zero salvage value) | $ | 330,000 | | $ | 515,000 |
| Annual revenues and costs: | | | | | |
| Sales revenues | $ | 370,000 | | $ | 470,000 |
| Variable expenses | $ | 168,000 | | $ | 218,000 |
| Depreciation expense | $ | 66,000 | | $ | 103,000 |
| Fixed out-of-pocket operating costs | $ | 82,000 | | $ | 68,000 |
|
The company’s discount rate is 15%.
Click here to view Exhibit 7B-1 and Exhibit 7B-2, to determinethe 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 project profitability index for eachproduct.
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B ispreferred.
6b. Based on the simple rate of return, Lou Barlow wouldlikely:
