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 25% each of the ast three years. He has computed the cost and revenue estimates for each product as follows: Product A Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 19% 5 366,300 $ 400,000 $ 100,000 $ 74,000 $ 85,000 Product B $ 530,000 $ 510,000 $ 250,000 $ 106,000 $ 72,000
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 25% each of the ast three years. He has computed the cost and revenue estimates for each product as follows: Product A Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues variable expenses Depreciation expense Fixed out-of-pocket operating costs The company's discount rate is 19% 5 366,300 $ 400,000 $ 100,000 $ 74,000 $ 85,000 Product B $ 530,000 $ 510,000 $ 250,000 $ 106,000 $ 72,000
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem 12-23 (Algo) Comprehensive Problem [LO12-1, LO12-2, LO12-3, LO12-5, LO12-6)
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 25% 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
Required:
1. Calculate the payback period for each product
2 Calculate the net present value for each product
Req 1
The company's discount rate is 19%
Click here to view Exhibit 128-1 and Exhibit 128-2. to determine the appropriate discount factor using tables
Payback period
Reg 3
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?
Complete this question by entering your answers in the tabs below.
Reg 4
years
Product A
$366,000
$ 400,000
$ 180,000
years
Reg GA
Req 2
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Product A
Product B
<Reg 1
$ 74,000
$ 85,000
Product B
Reg 5
$ 530,000
$ 510,000
$ 250,000
106,000
$
$ 72,000
Req 2 >
Reg 60
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