# profitability index

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 divisions 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: The company’s discount rate is 20%. 1. Calculate the payback period for each product. (Round your answers to 2 decimal places.) 2. Calculate the net present value for each product. (Round discount factor(s) to 3 decimal places.) 3. Calculate the internal rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) 4. Calculate the project profitability index for each product. (Round discount factor(s) to 3 decimal places. Round your answers to 2 decimal places.) 5. Calculate the simple rate of return for each product. (Round percentage answer to 1 decimal place. i.e. 0.1234 should be considered as 12.3%.) 6. (a) For each measure, identify whether Product A or Product B is preferred. Net Present Value, Profitably Index, Payback Period, Internal Rate of Return (b) Based on the simple rate of return, Lou Barlow would likely: Accept Product A Accept Product B Reject Both Product