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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. His annual pay raises are determined by his division’sreturn on investment (ROI), which has exceeded 17% each of the lastthree years. He has computed the cost and revenue estimates foreach product as follows:

Product AProduct B
Initial investment:
Cost of equipment (zero salvagevalue)$180,000$390,000
Annual revenues and costs:
Sales revenues$260,000$360,000
Variable expenses$124,000$174,000
Depreciation expense$36,000$78,000
Fixed out-of-pocket operatingcosts$71,000$50,000

The company’s discountrate is 15%.

Click here to viewExhibit 13B-1 and Exhibit 13B-2, to determine the appropriatediscount factor using tables.

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.

5. Calculate thesimple rate of return for each product.

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

6b. Based on thesimple rate of return, Lou Barlow would likely:

Answer & Explanation Solved by verified expert
4.4 Ratings (733 Votes)
Project A Initial Investment 180000 Net Income Sales Revenues Variable Expenses Depreciation Expenses Fixed outofpocket Operating Costs Annual Net Income 260000 124000 36000 71000 Annual Net Income 29000 Annual Net Cash flows Annual Net Income Depreciation Annual Net Cash flows 29000 36000 Annual Net Cash flows 65000 Project B Initial Investment 390000 Net Income Sales Revenues Variable Expenses Depreciation Expenses Fixed outofpocket    See Answer
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