Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufac
ID: 2533926 • 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:
Product A
Product B
Initial investment:
Cost of equipment (zero salvage value)
$
260,000
$
470,000
Annual revenues and costs:
Sales revenues
$
310,000
$
410,000
Variable expenses
$
144,000
$
194,000
Depreciation expense
$
52,000
$
94,000
Fixed out-of-pocket operating costs
$
76,000
$
56,000
The company’s discount rate is 18%.
Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor using tables.
Calculate the payback period for each product. (Round your answers to 2 decimal places.)
Product A
Product B
Payback period
2.89
years
years
Product B?
2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.)
Product A
Product B
Net present value
3. Calculate the internal rate of return for each product. (Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and round discount factor(s) to 3 decimal places.)
Product A
Product B
Internal rate of return
%
%
Product A
Product B
Initial investment:
Cost of equipment (zero salvage value)
$
260,000
$
470,000
Annual revenues and costs:
Sales revenues
$
310,000
$
410,000
Variable expenses
$
144,000
$
194,000
Depreciation expense
$
52,000
$
94,000
Fixed out-of-pocket operating costs
$
76,000
$
56,000
Explanation / Answer
Therefore for Product A
Product B
Therefore for Product B
Product A Cash Flow Estimation and Analysis Year 0 1 2 3 4 5 Capex (Rs) -260,000 Revenues (Rs) 310,000 310,000 310,000 310,000 310,000 Operating cost (Rs) 220,000 220,000 220,000 220,000 220,000 Depreciation (Rs) 52,000 52,000 52,000 52,000 52,000 Total Cost (Rs) 272,000 272,000 272,000 272,000 272,000 Operating Income (Rs) 38,000 38,000 38,000 38,000 38,000 Add back: Depreciation (Rs) 52000 52000 52000 52000 52000 Net Cash flow (Rs) -260,000 90,000 90,000 90,000 90,000 90,000Related Questions
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