Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2409882 • Letter: L
Question
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 division’s return on investment (ROI), which has exceeded 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
The company’s discount rate is 19%.
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 division’s return on investment (ROI), which has exceeded 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Explanation / Answer
Note: Answers rounded off to 2 decimal places.
Workings:
Profitability index = (Net Present Value + Initial investment)/Initial investment
Product A: ($110257.65 + 360000)/360000 = 1.31
Product B: ($150857.65 + 530000)/530000 = 1.28
Simple rate of return = Annual net income/Initial Investment
Product A: ($400000 - 180000 - 72000 - 85000)/$360000 = $63000/$360000 = 17.50%
Product B: ($510000 - 250000 - 106000 - 65000)/$530000 = $89000/$530000 = 16.79%
Product A Product B Project profitability index 1.31 1.28 Simple rate of return 17.50% 16.79%Related Questions
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