(show your work)

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 22% 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)	$ 350,000	$ 550,000
Annual revenues and costs:
Sales revenues	$ 390,000	$ 470,000
Variable expenses	$ 178,000	$ 210,000
Depreciation expense	$ 70,000	$ 110,000
Fixed out-of-pocket operating costs	$ 87,000	$ 67,000

The companys discount rate is 20%.

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?