Calculate the project profitability index for each product

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Reference no: EM131972120

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 22% each of the last three years.

He has computed the cost and revenue estimates for each product as follows:

Initial investment:		Product A		Product B
Cost of equipment (zero salvage value)	$	350,000	$	550,000
Annual revenues and costs:
Sales revenues	$	390,000	$	470,000
Variable expenses	$	178,000	$	210,000
Depreciation expense	$	51,000	$	93,000
Fixed out-of-pocket operating costs	$	87,000	$	67,000

The company's discount rate is 20%.

1. Calculate the internal rate of return for each product.

2. Calculate the project profitability index for each product.

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

Reference no: EM131972120

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