Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2499065 • 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 23% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables.
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)
Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and Round discount factor(s) to 3 decimal places.)
Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)
Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)
For each measure, identify whether Product A or Product B is preferred.
Based on the simple rate of return, Lou Barlow would likely:
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:
Explanation / Answer
1. Payback period:
Product A is preferred as it has a shorter payback period.
2. Net present value:
Product B seems to be preferred since it gives a higher NPV
3. Internal rate of return:
Product A with a higher IRR is preferred.
4. Profitability Index:
Product A gives a better PI and hence is preferred.
5. Simple rate of return:
Product A is preferred as rate of return is higher.
6b. Lou Barlow is likely to reject both products as the ROI of his division has consistently been above 23%. Both products give a simple return lower than 23%.
Product A Product B Initial investment 300,000 500,000 Annual cash flows 110,000 179,000 Payback period 2.73 years 2.79 yearsRelated Questions
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