Homework ×et) Grades. ACTG552.WOT? 2 O Not secure ezto.mheducation.com/hm.tpx ?×
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Homework ×et) Grades. ACTG552.WOT? 2 O Not secure ezto.mheducation.com/hm.tpx ?× volue 15.00 points Problem 8-23 Comprehensive Problem [LO8-1 LO8-2, LO8-3, LO8-5, LO8-6] 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 23% 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 Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs $260,000S 480,000 $330,000 $152 000 S 52,000 s 78,000 $ 430,000 S 202.000 $ 96.000 $ 58 000 The company's discount rate is 14%. Click here to view Exhibit 88-1 and Exhibit 88-2 to determine the appropriate discount tactor using tables. Required: 1 1. Calculate the payback period for each product, (Round your answers to 2 decimal places.)Explanation / Answer
1.Payback period for each product:Product A=2.6 years(see working note1)
Product B=2.82 years
Discounted payback period for each product:Product A=3.47 years
Product B=3.85 years
2.Internal Rate of return: Product A=2.6%( see working note 2)
Product B= 2.82%
3.Profitability Index: Product A=1.32(see working note 3)
Product B=1.22
4.Simple Rate of Return: Project A=18.46%(see working note4)
Project B=15.42%
Working Notes:
1)Payback Period: Initial Investment/Cash Inflows per period
Product A=$260000/$100,000=2.6 years
Product B=$ 480000/$170000=2.82 years
Discounted Payback Period
Product A(initial investment=$260000)
Year
Cash inflow
Pv factor
Present value
Of cash inflows
Cummulative
Cash Inflows
1
$ 1,00,000
0.877
$ 87700
$ 87700
2
$ 1,00,000
0.769
$ 76900
$ 164600
3
$ 1,00,000
0.675
$ 67500
$ 232100
4
$ 1,00,000
0.592
$ 59200
5
$ 1,00,000
0.519
$ 51900
= 3+27900/59200=3.47 years
Product B(initial investment=$ 480000)
Year
Cash inflow
Pv factor
Present value
Of cash inflows
Cummulative
Cash Inflows
1
$ 1,70,000
0.877
$ 149090
$ 149090
2
$ 1,70,000
0.769
$ 130730
$ 279820
3
$ 1,70,000
0.675
$ 114750
$ 394570
4
$ 1,70,000
0.592
$ 100640
$ 495210
5
$ 1,70,000
0.519
$ 88230
= 3years+85430/100640= 3.85 years.
2) Calculation of Internal Rate of Return
Product A= Net Initial Investment/Annual Cash Inflow
= 2,60,000 / $1,00,000=2.6 %
Product B= Net Initial Investment/Annual Cash Inflow
= $ 4,80,000/$1,70,000=2.82 %
3)Project Profitability Index=Total present value of cash inflows/Initial Investment
Product A=$ 343308.10/$ 260000=1.32
Product B=$ 583623.76/$ 480000=1.22
4) Simple Rate of Return :Incremental Net Income/Initial Investment
Product A=$48000/$260000=0.1846 i.e 18.46%
Product B=$74000/$480000=0.1542 i.e 15.42 %
Year
Cash inflow
Pv factor
Present value
Of cash inflows
Cummulative
Cash Inflows
1
$ 1,00,000
0.877
$ 87700
$ 87700
2
$ 1,00,000
0.769
$ 76900
$ 164600
3
$ 1,00,000
0.675
$ 67500
$ 232100
4
$ 1,00,000
0.592
$ 59200
5
$ 1,00,000
0.519
$ 51900
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