Aunt Sally's Food Inc. is considering expansion. 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 each year for the next 6 years. However, existing product line sales will be adversely affected by about $200,000 per year. 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 $160,000 per year and variable costs are 60% of annual sales. Also, initial working capital outlay of $150,000 will be required which will be recaptured at the end of the 6 years. Sally's tax rate is 35%. The firm requires an 18% return. Sally also requires a 25% after tax return on an accounting basis.


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