: ch. 11 Warm-up Exercis × O | ezto.mheducation.com/hm.tpx Lou Barlow, a divisio

Question

: ch. 11 Warm-up Exercis × O | ezto.mheducation.com/hm.tpx 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 21% 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) 270,000 480,000 Annual revenues and costs Sales revenues Variable expenses . Depreciation expense Fixed out-of-pocket operating costs $320,000 420,000 $148,000 198,000 54,000 96,000 77,000 57,000 The company's discount rate is 19% Click here to view Exhibit 118-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) 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 Calculate the net present value for each product (Use the appropriate table to determine the discount factor(s).) 2. Product A Product Net present valus

Explanation / Answer

Computation of Payback period for Product A

Payback period will be between 4 and 5 years as cum. cash flow is becoming positive.

so 4 + (19334.4/(20475-(-19334.4))*12

= 4.46 years

= 4 years 5.82 months

Computation of Payback period for Product B

by same method which applied for product A

4 + 44633.4/(24509.76-(-44633.4))

= 4.64 years

= 4 years and 7.74months

Calculation fo NPV from the above computation -

for product A - Sum of all Present value of Cashflow 20475.31

for Product B - Sum of all Present value of Cashflow 24509.76

Calculation will be as follows -

Please note all values are in $.

In case of further clarification required please comment.

For Product A Years 0 1 2 3 4 5 Cost of equipment -270000 Sales Revenue 320000 320000 320000 320000 320000 less Variable cost 148000 148000 148000 148000 148000 less Depriciation exp. 54000 54000 54000 54000 54000 Fixed out of pocket 77000 77000 77000 77000 77000 Cash flow 95000 95000 95000 95000 95000 Discounting @19% 1 0.840336 0.706165 0.593416 0.498669 0.419049 PV of Cashflow -270000 79831.93 67085.66 56374.5 47373.53 39809.69 Cum. PV cashflow -270000 -190168 -123082 -66707.9 -19334.4 20475.31

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