Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2742523 • 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 23% 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 14%. Click here to view Exhibit 13B-1 and Exhibit 13B-2. to determine the appropriate discount factor using tables. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Product A Product B Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place, i.e. 0.1234 should be considered as 12.3% and Round discount factor(s) to 3 decimal places.) Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. 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%.) For each measure, identify whether Product A or Product B is preferred. Based on the simple rate of return, Lou Barlow would likely:Explanation / Answer
Product A
Product A
0 1 2 3 4 5 Intial investment $ (280,000.00) Sales Revenue $ 330,000.00 $ 330,000.00 $ 330,000.00 $ 330,000.00 $ 330,000.00 Variable expenes $ (152,000.00) $ (152,000.00) $ (152,000.00) $ (152,000.00) $ (152,000.00) Depriciation $ (42,000.00) $ (42,000.00) $ (42,000.00) $ (42,000.00) $ (42,000.00) Out of pocket operating cost $ (78,000.00) $ (78,000.00) $ (78,000.00) $ (78,000.00) $ (78,000.00) Net Cash from operations $ (280,000.00) $ 100,000.00 $ 100,000.00 $ 100,000.00 $ 100,000.00 $ 100,000.00 Depriciation Add back $ 42,000.00 $ 42,000.00 $ 42,000.00 $ 42,000.00 $ 42,000.00 Discount Factor $ 1.00 $ 0.88 $ 0.77 $ 0.67 $ 0.59 $ 0.52 NPV sum of discounted cash flows Pay-back period(years) = return of intial investment amount after all cash inflows IRR PI Discounted Value $ (280,000.00) $ 87,719.30 $ 76,946.75 $ 67,497.15 $ 59,208.03 $ 51,936.87 63308.09689 4 years + 10000/280000 7.95% 1.2261 4.036Related Questions
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