Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2530230 • 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:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).)
Calculate the project profitability index for each product. (Use the appropriate table to determine the discount factor(s). Round your answers to 2 decimal places.)
Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and use the appropriate table to determine the discount factor(s).)
For each measure, identify whether Product A or Product B is preferred.
Based on the simple rate of return, Lou Barlow would likely:
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
Solution 1:
Payback period = Initial investment / Annual cash inflows
Product A = $360,000 / $135,000 = 2.67 years
Product B = $530,000 / $195,000 = 2.72 years
Solution 2:
Solution 3:
Profitability index = PV of cash inflows / PV of cash outflows
Product A = $412,781 / $360,000 = 1.15 times
Product B = $596,239 / $530,000 = 1.12 times
Solution 4:
Simple rate of return = Average annual income / Initial investment
Product A = $63,000 / $360,000 = 17.5%
Product B = $89,000 / $530,000 = 16.8%
Note: As per chegg policy i have answered first 4 parts. Kindly post separate question for answer of remaining parts.
Computation of Annual Income and Annual Cash Inflows Particulars Product A Product B Sales Revenue $400,000.00 $510,000.00 Variable expenses $180,000.00 $250,000.00 Fixed out of pocket operating cost $85,000.00 $65,000.00 Annual cash inflows $135,000.00 $195,000.00 Depreciation $72,000.00 $106,000.00 Annual income $63,000.00 $89,000.00Related Questions
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