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# Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell one of two new products for a five - year

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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$$s return on investment $($ROI$),$ which has exceeded $20\%$ each of the last three years. He computed the following cost and revenue estimates for each product: Product A Product B Initial investment: Cost of equipment $($zero salvage value$)$ $ $220,000$ $ $410,000$ Annual revenues and costs: Sales revenues $ $280,000$ $ $380,000$ Variable expenses $ $130,000$ $ $182,000$ Depreciation expense $ $44,000$ $ $82,000$ Fixed out$-$of$-$pocket operating costs $ $73,000$ $ $60,000$ The company$$s discount rate is $14\%.$ Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables. Required: $1.$ Calculate each product$$s payback period. $2.$ Calculate each product$$s net present value. $3.$ Calculate each product$$s internal rate of return. $4.$ Calculate each product$$s profitability index. $5.$ Calculate each product$$s simple rate of return. $6$a$.$ For each measure, identify whether Product A or Product B is preferred. $6$b$.$ Based on the simple rate of return, which of the two products should Lou$$s division accept?

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 computed the following cost and revenue estimates for each product:

Product A Product B

Initial investment:

Cost of equipment $($zero salvage value$)$ $ $220,000$ $ $410,000$

Annual revenues and costs:

Sales revenues $ $280,000$ $ $380,000$

Variable expenses $ $130,000$ $ $182,000$

Depreciation expense $ $44,000$ $ $82,000$

Fixed out$-$of$-$pocket operating costs $ $73,000$ $ $60,000$

The company$$s discount rate is $14\%.$

Click here to view Exhibit $14$B$-1$ and Exhibit $14$B$-2,$ to determine the appropriate discount factor$($s$)$ using tables.

Required:

$1.$ Calculate each product$$s payback period.

$2.$ Calculate each product$$s net present value.

$3.$ Calculate each product$$s internal rate of return.

$4.$ Calculate each product$$s profitability index.

$5.$ Calculate each product$$s simple rate of return.

$6$a$.$ For each measure, identify whether Product A or Product B is preferred.

$6$b$.$ Based on the simple rate of return, which of the two products should Lou$$s division accept?

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