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l Zain JO 10:50 PM ezto.mheducation.com 26% Problem 13-23 Comprehensive Problem [LO13-1, LO13-2, LO13-3, LO13-5, LO13-6) 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 division\'s return on investment (ROI), which has exceeded 21% each of the last three years. He has computed the cost and revenue estimates for each product as follows: Cost of equipment (ero salvage value) $210,000 420.000 38,000 74,000 80.000 54000 The company\'s discount rate is 19%. 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. (Round your answers to 2 decimal places.) Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) Calculate the internal rate of retum for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) Factor of

Solution

Calculation of Net Cash inflow & Operating Profit Product A Product B Sales Revenues               290,000            390,000 Less: Variable Expenses            (136,000)         (186,000) Less: Fixed out of Pocket Exp.               (74,000)            (54,000) Net Cash inflow                 80,000            150,000 Less: Dep.               (38,000)            (80,000) Net Operating Income                 42,000              70,000 Answer 1. Payback period = Intial investment / Cash Inflow per period Calculation of Pay Back Period Product A Product B Intial Investment (A)               210,000            420,000 Cash Inflow per Annum (B)                 80,000            150,000 Pay Back Period (A/B) 2.63 Years 2.80 Years Answer 2. Calculation of NPV of Project Particulars Year 19% 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              3.0576                  80,000               244,608       150,000                458,640 A. Total Cash Inflow - PV               244,608                458,640 Cash Outflow Cost of Investment 0              1.0000                210,000               210,000       420,000     420,000.0000 B. Total Cash Outflow - PV               210,000                420,000 NPV (A - B)                 34,608                  38,640 Answer 3. Year Project A Project B Intial Investment 0         (210,000)             (420,000) Expcted Net Cash inflow 1              80,000                150,000 2              80,000                150,000 3              80,000                150,000 4              80,000                150,000 5              80,000                150,000 Internal Rate of Return 26.19% 23.06% Answer 4. Project Profitability Index = PV of cash Inflow / Intial Investment Project A Project B PV of Cash Inflow (A)               244,608            458,640 Intial investment (B)               210,000            420,000 Project Profitability Index (A/B)                      1.16                   1.09 Answer 5. Simple Rate of Return = Average Accounting Profit / Intial Investment Project A Project B Net operating profit (A)                 42,000              70,000 Intial Investment (B)               210,000            420,000 Simple Rate of Return (A/B) 20.00% 16.67% 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 (21%)