Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2588082 • 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:
The company’s discount rate is 19%.
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.)
1.
Payback Period (years) : Product A? Product B?
2.
Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).)
Net Present Value: Product A? Product B?
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.)
Project Profitability Index: Product A? Product B?
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).)
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
1. Payback Period (years)
A B
payback period [Initial investment /Annual cash inflow] 360,000 / 135000 530,000 / 195000
= 2.67 years =2.72 years
Note:- A B
Sales revenues 400,000 510,000
less: Variable expenses 180,000 250,000
Depreciation expense 72,000 106,000
Fixed out-of-pocket operating costs 85,000 65,000
Annual Net income 63000 89000
Add: Depreciation expense 72,000 106,000
Annual cash inflow 135000 195000
2. Net Present Value of Product A = present value of cash inflow - present value of cash outflow
= 135000* PVAF(19%,5 years) - 360,000
= 135000 * 3.0576 - 360,000
= 412776 - 360,000
= 52776
Net Present Value of Product B = present value of cash inflow - present value of cash outflow
= 195000 * PVAF(19%,5 years) - 530,000
= 195000 * 3.0576 - 530,000
= 596232 - 530000
= 66232
3. Project Profitability Index Product A Product B
[present value of cash inflow / present value of cash outflow] 412776 / 360,000 596232 / 530000
= 1.15 = 1.12
4. Simple Rate of Return (%) Product A Product B
[Annual Net income / Initial investment] 63000 / 360,000 89000 / 530,000
= 17.5% = 16.8%
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