Problem $14-23($Algo$)$ Comprehensive Problem $[$LO$14-1,$ LO$14-2,$ LO$14-3,$ LO$14-5,$ LO$14-6]$

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 $23\%$ 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$)$ $ $300,000$ $ $500,000$

Annual revenues and costs:

Sales revenues $ $350,000$ $ $450,000$

Variable expenses $ $160,000$ $ $210,000$

Depreciation expense $ $60,000$ $ $100,000$

Fixed out$-$of$-$pocket operating costs $ $80,000$ $ $61,000$

The company$$s discount rate is $16\%.$

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?