Check my work Lou Barlow, a divisional manager for Sage Company, has an opportun
ID: 2519210 • Letter: C
Question
Check my work 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 19% each of the last three years. He has computed the cost and revenue estimates for each product as follows: points Product AProduct B Initial investment: Cost of equipment (zero salvage value) Annual revenues and costs: Sales revenues Variable expenses Depreciation expense Fixed out-of-pocket operating costs 190,000 400,000 eBook Print References 270,000 370,000 128, 000 178,000 $ 38,000 80,000 $ 72,000 52,000 The company's discount rate is 17%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor using tables Required . 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 project 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, Lou Barlow would likely:Explanation / Answer
Calculation of Net Cash inflow & Operating Profit Product A Product B Sales Revenues 270,000 370,000 Less: Variable Expenses (128,000) (178,000) Less: Fixed out of Pocket Exp. (72,000) (52,000) Net Cash inflow 70,000 140,000 Less: Dep. (38,000) (80,000) Net Operating Income 32,000 60,000 Answer 1. Payback period = Intial investment / Cash Inflow per period Calculation of Pay Back Period Product A Product B Intial Investment (A) 190,000 400,000 Cash Inflow per Annum (B) 70,000 140,000 Pay Back Period (A/B) 2.71 Years 2.86 Years Answer 2. Calculation of NPV of Project Particulars Year 17% Factor Project A Project B Amount Present value Amount Present value C D C X D E C X E Cash Inflow Net Cash Inflow 1 -5 3.19935 70,000 223,955 140,000 447,909 A. Total Cash Inflow - PV 223,955 447,909 Cash Outflow Cost of Investment 0 1.00000 190,000 190,000 400,000 400,000.0000 B. Total Cash Outflow - PV 190,000 400,000 NPV (A - B) 33,955 47,909 Answer 3. Year Project A Project B Intial Investment 0 (190,000) (400,000) Expcted Net Cash inflow 1 70,000 140,000 2 70,000 140,000 3 70,000 140,000 4 70,000 140,000 5 70,000 140,000 Internal Rate of Return 24.55% 22.11% Answer 4. Project Profitability Index = PV of cash Inflow / Intial Investment Project A Project B PV of Cash Inflow (A) 223,955 447,909 Intial investment (B) 190,000 400,000 Project Profitability Index (A/B) 1.18 1.12 Answer 5. Simple Rate of Return = Average Accounting Profit / Intial Investment Project A Project B Net operating profit (A) 32,000 60,000 Intial Investment (B) 190,000 400,000 Simple Rate of Return (A/B) 16.84% 15.00% Answer 6a. Net Present Value Profitability Index Payback Period Internal Rate of Return Project B Project A Project A Project A Answer 6b. Reject Both Project Since, Simple rate of return is Less then the Expected rate of return (19%)