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) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $ 390,000 585,000 $ 420,000 500,000 185,000 222,000 $ 78,000 117,000 $90,000 70,000 The company's discount rate is 21%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.

Explanation / Answer

4.

Profitability index = 1 + (Net present value/Initial investment)

Product A: 1 + (34268/390000) = 1 + 0.09 = 1.09

Product B: 1 + (23605/585000) = 1 + 0.04 = 1.04

5.

6A.

6B. Reject both products.

Since ROI is less than last three years ROI which was more than 23%.

Product A Product B Project profitability index 1.09 1.04

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.