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

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Accounting

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 22% eachof the last three years. He has computed the cost and revenueestimates for each product as follows: Product A Product B Initialinvestment: Cost of equipment (zero salvage value) $ 380,000 $575,000 Annual revenues and costs: Sales revenues $ 410,000 $490,000 Variable expenses $ 186,000 $ 218,000 Depreciation expense$ 76,000 $ 115,000 Fixed out-of-pocket operating costs $ 89,000 $70,000 The company’s discount rate is 20%. Click here to viewExhibit 12B-1 and Exhibit 12B-2, to determine the appropriatediscount factor using tables. Required: 1. Calculate the paybackperiod for each product. 2. Calculate the net present value foreach product. 3. Calculate the internal rate of return for eachproduct. 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:
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Solution 1 Computation of Annual cash inflows Particulars Product A Product B Sales revenue 410000 490000 Variable expenses 186000 218000 Fixed Out of pocket operating cost 89000 70000 Annual cash inflows 135000 202000 Payback period See Answer

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