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: Product A Product B Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: $ 190,000 $ 400,000 Sales revenues $ 270,000 $ 128,000 $ 38,000 $ 72,000 $ 370,000 $ 178,000 $ 80,000 $ 52,000 Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 17%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. 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.
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: Product A Product B Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: $ 190,000 $ 400,000 Sales revenues $ 270,000 $ 128,000 $ 38,000 $ 72,000 $ 370,000 $ 178,000 $ 80,000 $ 52,000 Variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 17%. Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables. 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.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Che
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:
ProductA
Product B
Initial investment:
Cost of equipment (zero salvage value)
Annual revenues and costs:
Sales revenues
Variable expenses
$ 190,000
$ 400,000
$ 270,000
$ 128,000
$ 38,000
$ 72,000
$ 370,000
$ 178,000
$ 80,000
$ 52,000
Depreciation expense
Fixed out-of-pocket operating costs
The company's discount rate is 17%.
Click here to view Exhibit 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor using tables.
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?
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Transcribed Image Text:EXHIBIT 14B-1 Present Value of $t;
Periods
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
21%
22%
23%
24%
25%
0.962 0.952 0.943 0.935 0.926 0.917
0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813
0.806 0.800
0.925 0.907 0.890 0.873 0.857
0.842
0.826
0,812
0.797
0.783 0.769
0,756 0743
0.731
0.706 0.694 0.683
0,624 0,609 0.593 0,579 0.564 0.551
0.718
0,672
0,661
0,650 0,640
0.889 0.864 0.840 0.816 0.794
0.772
0.751
0.731 0.712
0.693 0.675
0.658 0.641
0.537
0.524
0.512
4.
0.855 0.823 0,792 0,763 0.735
0.708
0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0,516
0,621
0.499 0,482 0,467
0,451 0.437 0.423 0.410
0.822 0.784 0.747
0.713
0.681
0,650
0.593 0.567 0.543 0.519
0.497 0.476 0.456 0.437 0.419
0.402 0.386 0.370
0.355 0.341
0.328
0.790
0,746
0.705 0,666
0.630
0.596
0.564
0.535 0.507 0.480 0.456 0.432
0.410
0.390 0.370 0.352 0.335
0.319
0.303
0.289
0.275
0.262
0,760 0.711
0.665 0.623
0.583
0.547
0.513
0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314
0.296 0.279
0.263 0.249 0.235 0.222 0.210
8
0.731
0.677 0.627 0.582 0.540 0.502 0.467
0.434 0.404 0.376 0.351 0.327
0.305 0.285 0,266 0.249 0.233
0.218
0.204 0.191
0.179
0.168
0.703
0.645 0.592 0.544
0.500 0.460
0.424 0.391 0.361
0.333 0.308 0,284 0.263 0.243 0.225 0.209 0.194
0.180
0.167
0.155
0144
0.134
10
0.676 0.614
0.558
0.508 0.463
0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191
0.176
0.162
0.149
0.137
0.126
0.116
0107
11
0,650 0,585 0,527 0.475
0.429 0.388 0.350 0.317 0.287 0.261
0.237 0.215
0.195
0.178
0.162
0.148 0,135
0.123
0.112
0.103
0.094 0.086
0.102 0.092 0.083 0.076 0.069
0.104 0.093 0.084 0.075 0.068 0.061 0.055
0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.044
0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.035
12
0.625 0.557
0.497
0.444
0.397
0.356
0.319
0.286 0.257 0.231
0.208 0.187
0,168
0,152
0.137
0.124
0.112
13
0.601 0.530 0,469
0.415
0.368 0.326 0.290 0.258 0.229 0.204 0.182
0.163
0.145
0.130
0.116
14
0.577
0.505 0.442
0.388 0.340 0.299 0.263 0.232 0.205 0.181
0.160
0.141
0.125
0.111
15
0.555 0.481
0.417
0.362
0.315
0.275 0.239 0.209 0.183
0.160
0.140
0.123
0.062 0.054 0,047 0.042 0.036 0.032 0.028
0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.023
16
0.534 0.458 0.394 0.339
0.292 0.252 0.218 0.188
0.163
0141
0.123
0.107 0.093 0.081
0.071
17
0.513
0.436
0.371
0.317
0.270 0.231
0.198
0.170
0.146
0.125
0.108
0.069 0.059 0.051 0,044 0.038 0.032 0.028 0.024 0.021
0.098 0.083 0.070 0.060 0,051 0.043 0.037 0.031 0,027 0.023 0.020 0.017
0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014
18
0.494 0.416
0.350 0.296 0.250 0.212
0.180
0.153
0.130
0.111
0.095 0.081
0.018
19
0.475 0.396
0.331
0.277
0.232 0,194
0.164
0.138
0.116
0.014
20
0.456 0.377
0.312
0.258 0.215
0.178
0.149
0.124
0.104
0.012
0.439 0.359 0.294 0.242 0.199
0.278
21
0.164
0.135
0.112
0.093 0.077
0.064 0.053 0,044 0,037
0.031
0.026 0.022 0.018
0.015 0.013
0.011
0,009
0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013
0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012
0.009 0.007
0.010 0.009 0.007 0.006
0.015 0.013 0.010 0.008 0.007 0.006 0.005
0.013 0.010 0.009 0.007 0.006 0.005 0.004
22
0.422 0.342
0.226 0.184
0.150
0.123
0.101
0.011
0.406 0.326 0.262 0.211
0.390 0.310
23
0.170
0.138
0.112
0.091
24
0.247
0.197
0.158
0.126
0.102
0.082 0.066 0,053 0.043 0.035 0.028 0,023 0.019
25
0.375 0.295 0.233 0,184
0.146
0.116
0.092 0.074 0.059 0.047
0.038 0.030 0.024 0.020 0.016
0,009 0.007 0,006 0,005 0.004 0.003
0.098 0.076 0.060 0.047 0.037. 0.029 0.023 0.018 0.014 0.011. 0.009 0.007 0.006 0.005 0.004 0.003 0.002
0,012 0.010 0.008 0,006 0.005 0.004 0.003 0.002 0.002
0.008 0.006 0,005 0.004 0.003 0.002 0.002 0.002
0.012 0,009 0.007 0.005 . 0.004 0.003 0.003 0.002 0.002 0.001
0.281 0.220 0.172
0.268 0.207 0.161
26
0.361
0.135
0.106
0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017
0.014
0.011
27
0.347
0.125
0.090 0.069 0,054 0.042 0,033
0.333 0.255 0.196
0.321 0.243 0.185
28
0.150
0.116
0.026 0.020 0.016
0.141
0.107
0.082 0.063 0.048 0.037 0.029 0.022 0.017
0.014 0.011
29
0.308 0.231
0.208 0.142
30
0.174
0.131
0.099 0.075 0,057 0.044 0.033 0.026 0.020 0.015
40
0.097 0.067 0.046 0.032 0.022 0.015
0.011
0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.000
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