Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2409418 • 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 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
2.
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:
Explanation / Answer
Computation of annual cash inflows and annual net income Product A Product B Sales revenue 400000 510,000 Less: Variable expense 180000 250,000 Less: Fixed cost out of pocket exp 85000 65,000 Annual Cash inflows 135000 195,000 Less: depreciation 72000 106,000 Annual Net income 63000 89,000 Average investment 180000 265000 (Investment /2) NPV: Product A Product B Annual Cash inflows 135000 195000 Annuity Factor at 19% for 5 years 3.0576 3.0576 Present value of inflows 412776 596232 Less: Initial Investment 360000 530000 Net present value 52776 66232 Project Profitability index: Product A Product B Present value of Inflows 412776 596232 Divide: Initial Investment 360000 530000 Profitability Index 1.15 1.125 Rate of return: Product A Product B Annual net income 63000 89000 Divide: Average investment 180000 265000 Average rate of return 35% 33.58% Choice of projeect NPV PI Rate of return Selection Product B Product A Product A
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