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 $310,000 $ 510,000 Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $360,000 $164,000 $ 45,000 $ 81,000 $ 460,000 $ 214,000 $ 87,000 $ 65,000 The company's discount rate is 18%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables. Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) O Answer is complete and correct. Product A 2.70 years Product B 2.82 years Payback period 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) O Answer is complete and correct. Product A Product Net present value $ 49,605 $ 55,987

Explanation / Answer

3. IRR

PROFITABILITY INDEX = 1 +NPV/INITIAL INVESTMENT

SIMPLE RATE OF RETURN = NET INCOME / INITIAL INVESTMENT

sale 360000 460000 variable cost 164000 214000 fixed 81000 65000 net cash flow 115000 181000

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

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