I need help with questions 4/5/6A
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 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
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Product A |
Product B |
Initial investment: |
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|
|
|
|
Cost of equipment (zero salvage value) |
$ |
210,000 |
|
$ |
420,000 |
Annual revenues and costs: |
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|
|
|
|
Sales revenues |
$ |
290,000 |
|
$ |
390,000 |
Variable expenses |
$ |
136,000 |
|
$ |
186,000 |
Depreciation expense |
$ |
42,000 |
|
$ |
84,000 |
Fixed out-of-pocket operating costs |
$ |
74,000 |
|
$ |
54,000 |
|
The company’s discount rate is 19%.
Click here to view Exhibit 8B-1 and Exhibit 8B-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.)
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Product A |
Product B |
Payback period |
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years |
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years |
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2. Calculate the net present value for each product.(Round discount factor(s) to 3 decimal places.)
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Product A |
Product B |
Net present value |
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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.)
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Product A |
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Product B |
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Internal rate of return |
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% |
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% |
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4. Calculate the project profitability index for each product.(Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.)
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Product A |
Product B |
Project profitability index |
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5. Calculate the simple rate of return for each product.(Round percentage answers to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)
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Product A |
Product B |
Simple rate of return |
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% |
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% |
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6a. For each measure, identify whether Product A or Product B is preferred.
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Net Present Value |
Profitability Index |
Payback Period |
Internal Rate of Return |
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