posted by umi on .
Aunt Sallys foods is a full line producer of ready to use jarred food. Their products are well received in the market place competing with other brands as ragu and heinz. Consider the following expansion opportunity for Aunt Sally. Sally is considering expansion into a new line of all natural cholesterol free sodium free low calorie tomato sauces. Sally has paid $100,000 for a marketing study to assist in the potential valuation. The study indicates that the new product will have sales of $1,500,000 per year for each of the the next 6 years. However,existing product line sales will be adversely affected by about $200,000 per year. Manufacturing and plant equipment will cost $1,100,000 and will be depreciated on the straight line method with no salvage value at the end of 6 years. Annual fixed costs are projected at $160,000 per year and variable costs are projected aat 60% of annual sales. Also, an initial working capital outlay of $150,000 will be required which will be recaptured at the end of the 6 yrs. Sallys tax rate is 35% and the firm requires an 18% return. Sally also requires a 25% after tax return on an accounting basis. Based on the following criteria: 1. what is the Net Present Value 2. Internal rate of return, and 3. Average accounting return, should sally undertake project?