Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2444873 • 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:
50,000
The company’s discount rate is 16%.
Calculate the project profitability index for each product. (Round discount factor(s) to three decimal places. Round your answers to 2 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 A Product 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 project profitability index for each product. (Round discount factor(s) to three decimal places. Round your answers to 2 decimal places.)
Explanation / Answer
Assuming Fixed cost is payable every year. Depreciation being a non cash expense should not be considered
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
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.