Homework SourseLou Barlow a divisional manager for Sage Company has an oppo
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 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows:
The company’s discount rate is 19%.
| 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 25% each of the last three years. He has computed the cost and revenue estimates for each product as follows: |
Solution
Note: Answers rounded off to 2 decimal places.
Workings:
Profitability index = (Net Present Value + Initial investment)/Initial investment
Product A: ($110257.65 + 360000)/360000 = 1.31
Product B: ($150857.65 + 530000)/530000 = 1.28
Simple rate of return = Annual net income/Initial Investment
Product A: ($400000 - 180000 - 72000 - 85000)/$360000 = $63000/$360000 = 17.50%
Product B: ($510000 - 250000 - 106000 - 65000)/$530000 = $89000/$530000 = 16.79%
| Product A | Product B | |
| Project profitability index | 1.31 | 1.28 |
| Simple rate of return | 17.50% | 16.79% |
