Problem 14-23 (Algo) Comprehensive Problem [LO14-1, LO14-2, LO14-3, LO14-5, LO14-6] Lou Barlow, a divisional manager...

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Accounting

Problem 14-23 (Algo) Comprehensive Problem [LO14-1, LO14-2, LO14-3, LO14-5, LO14-6]

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 divisions return on investment (ROI), which has exceeded 23% each of the last three years. He computed the following cost and revenue estimates for each product:

	Product A	Product B
Initial investment:
Cost of equipment (zero salvage value)	$ 390,000	$ 585,000
Annual revenues and costs:
Sales revenues	$ 420,000	$ 500,000
Variable expenses	$ 185,000	$ 222,000
Depreciation expense	$ 78,000	$ 117,000
Fixed out-of-pocket operating costs	$ 90,000	$ 70,000

The companys discount rate is 21%.

Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using tables.

Required:

1. Calculate each products payback period.

2. Calculate each products net present value.

3. Calculate each products internal rate of return.

4. Calculate each products profitability index.

5. Calculate each products simple rate of return.

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 Lous division accept?

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