Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of...

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Accounting

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.

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3.9 Ratings (481 Votes)

Project A Initial Investment 370000 Annual Net Income Sales Revenues Variable Expenses Depreciation Expenses Fixed outofpocket Operating Costs Annual Net Income 400000 180000 74000 85000 Annual Net Income 61000 Annual Net Cash flows Annual Net Income Depreciation Annual Net Cash flows 61000 74000 Annual Net Cash flows 135000 Project B Initial See Answer

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	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