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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Product A Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. $ 173,660 $ 270,000 $ 130,000 $ 44,000 $80,000 Product B $ 390,000 $360,000 $ 180,000 $ 86,000 $ 60,000 The company's discount rate is 16%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. 4. Calculate the profitability index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, identify whether Product A or Product B is preferred. 6b. Based on the simple rate of return, which of the two products should Lou's division accept?
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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs Product A Required: 1. Calculate the payback period for each product. 2. Calculate the net present value for each product. 3. Calculate the internal rate of return for each product. $ 173,660 $ 270,000 $ 130,000 $ 44,000 $80,000 Product B $ 390,000 $360,000 $ 180,000 $ 86,000 $ 60,000 The company's discount rate is 16%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables. 4. Calculate the profitability index for each product. 5. Calculate the simple rate of return for each product. 6a. For each measure, identify whether Product A or Product B is preferred. 6b. Based on the simple rate of return, which of the two products should Lou's division accept?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text: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 19% each of the
last three years. He has computed the cost and revenue estimates for each product as follows:
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
Req 1
Req 2
Complete this question by entering your answers in the tabs below.
The company's discount rate is 16%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables.
Req 3
Internal rate of return
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, which of the two products should Lou's division accept?
Product A
Product A
Req 4
%
$ 173,660
Product B
%
$ 270,000
$ 130,000
$ 44,000
$80,000
<. Prev
Req 5
Product B
Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be
considered as 12.3%.)
$ 390,000
5 of 5
$360,000
$ 180,000
$ 86,000
$ 60,000
Req 6A
Req 6B
Next
Transcribed Image Text: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 19% each of the
last three years. He has computed the cost and revenue estimates for each product as follows:
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
Sales revenues
Variable expenses
Depreciation expense
Fixed out-of-pocket operating costs
Req 1
Req 2
Complete this question by entering your answers in the tabs below.
The company's discount rate is 16%.
Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor using tables.
Req 3
Internal rate of return
Required:
1. Calculate the payback period for each product.
2. Calculate the net present value for each product.
3. Calculate the internal rate of return for each product.
4. Calculate the profitability index for each product.
5. Calculate the simple rate of return for each product.
6a. For each measure, identify whether Product A or Product B is preferred.
6b. Based on the simple rate of return, which of the two products should Lou's division accept?
Product A
Product A
Req 4
%
$ 173,660
Product B
%
$ 270,000
$ 130,000
$ 44,000
$80,000
<. Prev
Req 5
Product B
Calculate the internal rate of return for each product. (Round your percentage answers to 1 decimal place i.e. 0.123 should be
considered as 12.3%.)
$ 390,000
5 of 5
$360,000
$ 180,000
$ 86,000
$ 60,000
Req 6A
Req 6B
Next
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VIEWStep 2: 1. Calculate the payback period for each Project
VIEWStep 3: 2. Calculate the NPV for each project
VIEWStep 4: 3. Calculate the IRR for each Project
VIEWStep 5: 4. Calculate the Profitability index for each Project
VIEWStep 6: 5. Calculate the Simple rate of return for each Project
VIEWStep 7: 6. Identify which Project/Product is preferred under each measure
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