Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2444871 • 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 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Product AProduct B Initial investment: Cost of equipment (zero salvage value)$170,000 $380,000 Annual revenues and costs: Sales revenues$250,000 $350,000 Variable expenses$120,000 $170,000 Depreciation expense$34,000 $76,000 Fixed out-of-pocket operating costs$70,000 $50,000
The company’s discount rate is 16%.
Calculate the net present value for each product. (Round discount factor(s) to three decimal places.)
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 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Product AProduct B Initial investment: Cost of equipment (zero salvage value)$170,000 $380,000 Annual revenues and costs: Sales revenues$250,000 $350,000 Variable expenses$120,000 $170,000 Depreciation expense$34,000 $76,000 Fixed out-of-pocket operating costs$70,000 $50,000
The company’s discount rate is 16%.
Calculate the net present value for each product. (Round discount factor(s) to three decimal places.)
Explanation / Answer
Depreciation being a non cash. Also calculations are made on the assumptions that Fixed costs are an annual cash outflow.
Particulars A B Annual Revenues 250000 350000 Variable expenses -120000 -170000 Fixed operating costs -70000 -50000 Net Cash Inflow PA 60000 130000 DF @ 16% 1.810639 1.810639 Discounted cash inflows 108638.3 235383.1 PV of cash outflows 170000 380000 NPV -61361.7 -144617Related Questions
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