Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac

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 years 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Product A Product B Net present value

Explanation / Answer

Year Sales Revenue Variable Exp Dep Fixed Exp Total PV at 14% Present value of cashflows Cumulative cash flows 0 -280000 -280000 1 330000 152000 42000 78000 58000 0.8772 50877.6 50877.6 2 330000 152000 42000 78000 58000 0.7695 44631 95508.6 3 330000 152000 42000 78000 58000 0.675 39150 134658.6 4 330000 152000 42000 78000 58000 0.5921 34341.8 169000.4 5 330000 152000 42000 78000 58000 0.5194 30125.2 199125.6 -80874.4 Year Sales Revenue Variable Exp Dep Fixed Exp Total PV at 14% Present value of cashflows Cumulative cash flows 0 -480000 -480000 1 430000 202000 84000 60000 84000 0.8772 73684.8 73684.8 2 430000 202000 84000 60000 84000 0.7695 64638 138322.8 3 430000 202000 84000 60000 84000 0.675 56700 195022.8 4 430000 202000 84000 60000 84000 0.5921 49736.4 244759.2 5 430000 202000 84000 60000 84000 0.5194 43629.6 288388.8 -191611.2

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