Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2530234 • 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 20% 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 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Explanation / Answer
1) Payback period = investment required / annual net cash inflows
2)
3) Profitability index = PV of cash inflows / initial investment
4) Rate of return = average accounitng profit / investment rewuired
5a)
5b) Based on the simle rate of return, Lou Barlow will reject both the projects as the return is less than 20% which is the divisions return on investment for the last three years and his annual pay raises are determined by this.
Product A Product B Annual net cash flows Sales revenue $3,10,000 $4,10,000 Less: variable expenses $1,44,000 $1,94,000 Fixed out of pocket operating expenses $76,000 $56,000 Annual net cash flows $90,000 $1,60,000 Investment required $2,60,000 $4,70,000 Payback period 2.89 years 2.94 yearsRelated Questions
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