Problem 13-23 Comprehensive Problem

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 divisions 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 companys discount rate is 16%.

Required:

Calculate the payback period for each product. (Round your answers to 2 decimal places.) Calculate the net present value for each product. (Round discount factor(s) to three decimal places.) Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3% and Round discount factor(s) to 3 decimal places.) Calculate the project profitability index for each product. (Round discount factor(s) to three decimal places. Round your answers to 2 decimal places.) Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.)