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
| Product A | Product B | |
|---|---|---|
| Initial investment: | ||
| Cost of equipment (zero salvage value) | $ 180,000 | $ 390,000 |
| Annual revenues and costs: | ||
| Sales revenues | $ 270,000 | $ 360,000 |
| Variable expenses | $ 130,000 | $ 180,000 |
| $ 44,000 | $ 86,000 | |
| Fixed out-of-pocket operating costs | $ 80,000 | $ 60,000 |
The company’s discount rate is 16%.
Required:
1. Calculate the payback period for each product.
2. Calculate the
3. Calculate the
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4. Calculate the profitability index for each product.
5. Calculate the simple
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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