In order to compute the return on investment we will first need to compute the cash flows for 5 years for both the products to find which one of the product will provide the company with returns of more than 18% which is the minimum return the company expects.
In order to find the discounted cash inflows @18% we first need to find profit for both the products as below:
Product A
Sales 360000
Less Variable Expenses 164000
Less Fixed Costs 81000
Net Income 115000
Cash Flow for 5 Years discounted @18% 3.24
Total Cash Inflow for Product A $372685
Product B
Sales 460000
Less Variable Overheads (214000)
Less Fixed Expense (65000)
Net Income 181000
Cash Flow for 5 Years discounted @18% 3.24
Cash Inflow for Product B $586573
Net Cash Flow for A and B
A B
Net Inflows for 5 years $372685 $586574
Net Outflow $310000 $510000
Net Cash Flow $62685 $76574
Note: We will ignore depreciation wile calculating the above cash flows as depreciation is not a cash expense also depreciation needs to be considered only if tax information is given, which is absent in this question.
Discounted Factor has been found using attached formula, where r is rate of discount and n is period of time.
As can be observed in the above calculation we can see that product B gives a better result thus it should be considered.
