Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2532686 • 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 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Calculate the net present value for each product. (Use the appropriate table to determine the discount factor(s).)
Calculate the project profitability index for each product. (Use the appropriate table to determine the discount factor(s). 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% and use the appropriate table to determine the discount factor(s).)
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 20% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Explanation / Answer
Cash Flow
Product A = $310000 – 144000 - $76000 = $90000
Product B =$410000 – 194000 – 56000 = $160000
Net Income
Product A = $38000
Product B =$66000
1.Calculate the payback period for each product
= Initial Investment / cash flow
Product A = $260000 / 90000 = 2.99 Years
Product B = $470000 / 160000 = 2.94 Years
2.Calculate the net present value for each product.
Product A = ($90000 x 3.12717) - $260000
= 281445 – 260000
= $ 21,445
Product B = ($160000 x 3.12717) - $470000 = $ 30,347
= 500347 – 470000
= $30,347
3.Calculate the project profitability index for each product
Profitability Index = Present value of cash flow / Investment
Product A = $2,81,445 / 260000 = 1.08
Product B = 500347 / 470000 = 1.06
4.Calculate the simple rate of return for each product.
simple rate of return = (Net Income / Investment)*100
Product A = ($38000 / 260000) * 100 14.62%
Product B = (66000 / 470000 ) *100 = 14.04%
5.For each measure, identify whether Product A or Product B is preferred.
Payback Method = Product B
NPV Method = Product B
Profitability Index Method = Product A
Simple Rate of return = Product A
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