Aunt Sally’s Foods, Inc. is a full line producer and distributor of ready to use

Question

Aunt Sally’s Foods, Inc. is a full line producer and distributor of ready to use jarred food products such as gravies and sauces. Their products are well received in the marketplace competing with such brand names as Franco-American, Ragu and Heinz. Consider the following expansion opportunity for Aunt Sally’s Foods, Inc. Sally is considering expansion into a new line of all natural, cholesterol free, low sodium, low-calorie tomato sauces. Sally has paid $100,000 for a marketing study to assist in this and other potential valuations. The study indicates that the new product will have sales of $1,900,000 per year for each of the next 6 years. However, existing product line sales will be reduced by $200,000 per year. Manufacturing plant and equipment will cost $1,100,000 and will be depreciated on the straight-line method with a 10% market value (salvage value) at the end of 6 years. Annual fixed costs are projected at $160,000 per year and variable costs are projected at 55% of sales. Also, an initial working capital outlay of $175,000 will be required which will be recaptured at the end of the 6 years. Sally’s tax rate is 30% and the firm requires an 18% return. Based on the following criteria: 1) Net Present Value, and 2) Internal Rate of Return, should Sally undertake this project? (Please round to the nearest dollar on all calculations)

Explanation / Answer

NPV 1 Initial investment 11,00,000.00 Increase in Working capital     1,75,000.00 Net Cash Outlay 12,75,000.00 2 Operating Cash flow Increase in revenue Additional Sales Per Year 19,00,000.00 Less reduction in existing sales -2,00,000.00 Increase in Revenue 17,00,000.00 Less Operating cost Fixed cost per Year     1,60,000.00 Variable Cost per Year 10,45,000.00 12,05,000.00 Net Cash inflow Before Tax     4,95,000.00 Less Tax @ 30%     1,48,500.00 Net Cash inflow After Tax     3,46,500.00 PVAF 18% for 6 years 3.49760256 Present Value Net Cash inflow After Tax 12,11,919.29 Depreciation Tax Shield=(1100000-110000)/6*.30        49,500.00 PVAF 18% for 6 years 3.49760256 Present Value Depreciation Tax Shield     1,73,131.33 Total 13,85,050.61 3 Disposal Value Working Capital     1,75,000.00 10% initial investment in Equipment     1,10,000.00 Net     2,85,000.00 DF 0.370431539 Discounted cash flow     1,05,572.99 4 NPV=3+2-1     2,15,623.60 IRR 1 Initial investment 11,00,000.00 Increase in Working capital     1,75,000.00 Net Cash Outlay 12,75,000.00 2 Operating Cash flow Increase in revenue Additional Sales Per Year 19,00,000.00 Less reduction in existing sales -2,00,000.00 Increase in Revenue 17,00,000.00 Less Operating cost Fixed cost per Year     1,60,000.00 Variable Cost per Year 10,45,000.00 12,05,000.00 Net Cash inflow Before Tax     4,95,000.00 Less Tax @ 30%     1,48,500.00 Net Cash inflow After Tax     3,46,500.00 PVAF 24% for 6 years 3.020471303 Present Value Net Cash inflow After Tax 10,46,593.31 Depreciation Tax Shield=(1100000-110000)/6*.30        49,500.00 PVAF 24% for 6 years 3.020471303 Present Value Depreciation Tax Shield     1,49,513.33 Total 11,96,106.64 3 Disposal Value Working Capital     1,75,000.00 10% initial investment in Equipment     1,10,000.00 Net     2,85,000.00 DF 0.275086887 Discounted cash flow        78,399.76 4 NPV=3+2-1             -493.60 Hence IRR 24%

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.