Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2486542 • 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) 280,000 480,000 Annual revenues and costs Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $330,000 430,000 $152,000 202,000 $ 42,000 84,000 $ 78,000 60,000 The company's discount rate is 14% 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 yearsExplanation / Answer
1. Payback period
Annual Cashflow for project A = 330,000 - 152,000 - 78,000 = $100,000
Initial Investment = $280,000
Payback period = 280,000 / 100,000 = 2.8 years
Annual Cashflow for project B = 430,000 - 202,000 - 60,000 = $168,000
Initial Investment = $480,000
Payback period = 480,000 / 168,000 = 2.86 years
2. Net Present Value
Project A
Annual cashinflow 100,000 for 5 yrs
PV Annuity of 100,000, N 5, R 14% = 343,300
PV of Cashoutflow = 280,000
Net Present Value = $63,300
Project B
Annual cashinflow 168,000 for 5 yrs
PV Annuity of 168,000, N 5, R 14% = 576,744
PV of Cashoutflow = 480,000
Net Present Value = $96,744
4. Profitability index
Project A = 343,300 / 280,000 = 1.23
Project B = 576,744 / 480,000 = 1.20
5. Simple rate of return
Project A
Net Income = 58,000
Rate of return = 58000 / 280000 = 20.71
Project B
Net Income = 84,000
Rate of return = 84000 / 480000 = 17.5%
6a
Net Present Value Profitability index Payback Period Internal Rate of Return Project B Project A Project ARelated Questions
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