Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac

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 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) $310,000 $ 510,000 Annual revenues and costs Sales revenues $360,000 $ 460,000 Variable expenses $164,000 $214,000 Depreciation expense $ 62,000 $ 102,000 Fixed out-of-pocket operating costs $ 81,000 $ 61,000 The company's discount rate is 21% Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables Required: 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) Product A Product B Payback period years ears

Explanation / Answer

Solution.

1. Calculation of P.B.P

PBP of product A = 2 + (80,000 / 115,000) .69 = 2.69 year.

PBP of product B = 2 + (140,000/185,000 ) .75 = 2.75 year.

3.

2. Calculation of NPV.

3. Calculation of IRR

4 . Calculation of profit ability index.

Project A. =

= ( 336 467 / 310,000 ) = 1.08.

Project B = ( 541,267 / 510,000 ) = 1.06

5.

Normal rate of return project A = $53,000 / 310,000 = 17.09%

Normal rate of return project B = $83,000 / 510,000 = 16.27%

6b.

Accept project A

Normal Cash inflow Cumulative Cash inflow Year Product A Product B Product A Product B 0 (310,000.00) (510,000.00) 1     115,000.00     185,000.00            115,000.00     185,000.00 2     115,000.00     185,000.00            230,000.00     370,000.00 3     115,000.00     185,000.00            345,000.00     555,000.00 4     115,000.00     185,000.00            460,000.00     740,000.00 5     115,000.00     185,000.00            575,000.00     925,000.00

Related Questions

Navigate

• Browse (All)
• Browse L
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.