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: 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%.Required:1. Calculate the payback period for each product.2. Calculate the net present value for each product.3. Calculate the internal rate of return for each product. 4. Calculate the project profitability index for each product. 5. Calculate the simple rate of return for each product.6a. For each measure, identify whether Product A or Product B is preferred.6b. Based on the simple rate of return, Lou Barlow would likely:Accept Product AAccept Product BReject both products

Answer 1

Answer:b neither

Explanation:since both came in below 18% both unworthy.

Answer 2

Product A will be preferred and accepted.

Step-by-step explanation:

It should be understood that based on the result from the present value of the products, it will be concluded that Product A will preferred to product B, because it's present value is a little bit more when compared to the other.