Problem 13-23 Comprehensive Problem Lou Barlow, a divisional manager for Sage Co
ID: 2488032 • Letter: P
Question
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 division’s 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:
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%.)
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 18% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
Explanation / Answer
Payback period = Initial Investment /Annual CFAT
Product A = 170000/60000
= 2.83 Years
Product B = 380000/130000
= 2.92 years
Calculation of NPV
Product A = 60000 x {1/1.161 + 1/1.162 + 1/1.163 + 1/1.164 + 1/1.165} - 170000
= 60000 x 3.27 - 170000
= 26200
Product B = 130000 x {1/1.161 + 1/1.162 + 1/1.163 + 1/1.164 + 1/1.165} - 380000
= 45100
Internal rate of return
Product A = 170000/60000 = 2.833
Interpolation
IRR = 22% + (2.8636 - 2.8333)/(2.8636-2.8035)
= 22.50%
Product B = 380000/130000 = 2.9230
Applying Interpolation
IRR = 21% + (2.9260 - 2.9230)/(2.9260 - 2.8636)
= 21.05%
Profitability Index = PV. oh Cash inflows/PV. of cash outflows
Product A = 60000x3.27/170000 = 1.15
Product B = 130000x3.27/380000 = 1.12
Simple return
Product A = 60000/170000 x 100 = 35.39%
Product B = 130000/380000 x 100 = 34.21%
Product A Product B Sales 250000 350000 Less: Variable expenses 120000 170000 Less: Fixed cost 70000 50000 CFAT 60000 130000