## Question

# Problem 14-23 (Static) Comprehensive Problem [LO14-1, LO14-2, LO14-3, LO14-5, LO14-6] Lou Barlow, a divisional manager for Sage Company, has an opportunity to manufacture and sell

Problem 14-23 (Static) Comprehensive Problem [LO14-1, LO14-2, LO14-3, LO14-5, LO14-6] 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 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%.

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

**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 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, which of the two products should Lous division accept?

**Complete this question by entering your answers in the tabs below.**

- Req 1
- Req 2
- Req 3
- Req 4
- Req 5
- Req 6A
- Req 6B

## Step by Step Solution

There are 3 Steps involved in it

### Step: 1

Lets address each of the required calculations step by step 1 Calculate the payback period for each product The payback period is the time it takes for the investment to be recovered from the net cash ...### Get Instant Access to Expert-Tailored Solutions

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### Step: 2

### Step: 3

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