m.tpx? -0.4876110241878203.1461809241830 Lou Barow, a dvisional manager for Sage

Question

m.tpx? -0.4876110241878203.1461809241830 Lou Barow, a dvisional manager for Sage Company, has an opportunilty to manufacture and sell one of two new products for a five-yoar period His annual pay raises are determined by his division's return on investment (ROI), which has estimates for each product as follows 18% each of the last three years. He has computed the cost and revenue Cost of equipment (zoro salvage value)$170,000 Annual revenues and costs Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating $ 380,000 $250,000 $ 350,000 $120,000 170,000 S 34,000 76,000 $70,000 50,000 The company's discount rate is 16% Click here to view Exhibit 138-1 and Exhibit 13B-2, to determine the appropriat e dis.count factor using tables Required: 1. Calculate the payback period for eech product. (Round your answers to 2 decimal places.) Product A Product B Payback period Ask me anything

Explanation / Answer

Calculation of NPV Particulars Project - A Project - B Sales Revenues 250000 350000 Less: Variable Expenses 120000 170000 Depreciation of Expenses 34000 76000 Fixed out of Pocket Operating Cost 70000 50000 Net Profit Per the year 26000 54000 Add: Depreciation expenses             (Non Cash Expenses) 34000 76000 Total Cash Inflow 60000 130000 Initial Investment 170000 380000 Payback Period 2.83 Years 2.92 Years (Initial Investment / Cash Inflow per year) NPV Total Cash Inflow 60000 130000 PV Factor @ 16% for 5 years 3.2742 3.2742 Total Cash Inflows from the project - A 196452 425646 Initial Investment - B 170000 380000 NPV (A-B) 26452 45646 Profitability Index Profitability Index = PV of Cash Inflow / Initial Investment Profitability Index 1.16 1.12 Calculation of IRR IRR is the interest rate at which NPV is Zero PV of Cash Inflows are equal to the Initial Investment At 21 % interest rate NPV is Zero Total Cash Inflow 60000 130000 PV Factor @ 21% for 5 years 2.8636 2.926 (22% Interest Rate) (22% Interest Rate) Total Cash Inflows from the project - A 171816 380380 Initial Investment - B 170000 380000 NPV (A-B) 1816 380 IRR 22% 21% Simple Rate of Return Simple Interest Rate = A = P (1+rt) Initial InvestmenT (P) 170000 380000 Return on Investment 18% 18% Simple Rate of Return 153000 342000 (170000*18%*5 years) (380000*18%*5 years) Based on the Simple Interest rate Low Borrow would likely to Accept the both projects because the simple interest are lower than the initial investment

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