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 23% 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) $290,000 $490,000
Annual revenues and costs:
Sales revenues $340,000 $440,000
Variable expenses $154,000 $206,000
Depreciation expense $58,000 $98,000
Fixed out-of-pocket
operating costs $79,000 $59,000
The company's discount rate is 16%.
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 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:
1. Accept Product A
2. Accept Product B
3. Reject both products

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 project profitability index for each product.

5. Calculate the simple rate of return for each product.

6B. Based on the simple rate of return, Lou Barlow would likely:

Explanation:

                                       Product A               Product B

Initial investment:

Cost of equipment          $290,000              $490,000

Annual revenues and costs:

Sales revenues              $340,000               $440,000

Variable expenses         $154,000               $206,000

Depreciation expense    $58,000                 $98,000

Fixed out-of-pocket

operating costs               $79,000                 $59,000

net cash flow                  $107,000                $175,000

The company's discount rate is 16%.

payback period

A = $290,000 / $107,000 = 2.71 years, A is preferred

B = $490,000 / $175,000 = 2.8 years

using an excel spreadsheet I calculated the NPV and IRR

NPV

A = $60,349

B = $83,001, B is preferred

IRR

A = 25%, A is preferred

B = 23%

Project profitability

A = $350,349 / $290,000 = 1.21

B = $573,001 / $490,000 = 1.17

Simple rate of return

A = $535,000 / $290,000 = 184%, A is ´preferred

B = $875,000 / $490,000 = 179%

it's actually a very difficult task, due to not many people can make 2 million dollars in 2 years. besides that, to the not-so-realistic ideas, you can create a business. it could be practically anything, but make it into a business that isn't that known yet, you get me? also, lets not forget about stock market. that's where all the good stuff happens. use investments at the beginning and begin to raise up your business or whatever you're going to do. as this is a very non-realistic idea, it's still worth the shot!

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