Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2466754 • 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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Product A Product B Initial investment Cost of equipment (zero salvage value) $310,000 $ 510,000 Annual revenues and costs Sales revenues $360,000 $ 460,000 Variable expenses $164,000 $214,000 Depreciation expense $ 62,000 $ 102,000 Fixed out-of-pocket operating costs $ 81,000 $ 61,000 The company's discount rate is 21% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years earsExplanation / Answer
Solution.
1. Calculation of P.B.P
PBP of product A = 2 + (80,000 / 115,000) .69 = 2.69 year.
PBP of product B = 2 + (140,000/185,000 ) .75 = 2.75 year.
3.
2. Calculation of NPV.
3. Calculation of IRR
4 . Calculation of profit ability index.
Project A. =
= ( 336 467 / 310,000 ) = 1.08.
Project B = ( 541,267 / 510,000 ) = 1.06
5.
Normal rate of return project A = $53,000 / 310,000 = 17.09%
Normal rate of return project B = $83,000 / 510,000 = 16.27%
6b.
Accept project A
Normal Cash inflow Cumulative Cash inflow Year Product A Product B Product A Product B 0 (310,000.00) (510,000.00) 1 115,000.00 185,000.00 115,000.00 185,000.00 2 115,000.00 185,000.00 230,000.00 370,000.00 3 115,000.00 185,000.00 345,000.00 555,000.00 4 115,000.00 185,000.00 460,000.00 740,000.00 5 115,000.00 185,000.00 575,000.00 925,000.00Related Questions
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