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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. I NEED TO FIND 1) NET PRESENT VALUE 2) INTERNAL RATE OF RETURN 3) AVERAGE ACCOUNTING RETURN PLEASE HELP!!
Started by pwilliams ( Tri-State College of Acupuncture )
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1) Net Present Value: In order to calculate the Net Present Value (NPV), we need to consider the expected cash flows for each year for the 6 year duration of the project plus the initial capital outlay. We calculate the present value of each cash flows discounted at the required rate of return. Initial outflow (Investment): $1,100,000 The expected cash flows from operations each year: Year 1: $1,292,000 Year 2: $1,128,800 Year 3: $967,040 Year 4: $808,672 Year 5: $653,549 Year 6: $501,639 Total inflow (Revenue): $6,243,780 The net present value can then be calculated using the following formula: NPV = -1,100,000 + Σ(PV of expected cash flows at required rate of return) Where i = the required rate of return (e.g. 18%) NPV = -1,100,000 + 6,243,780*(1/(1+i)^t) where t = the number of years (1-6) Therefore, the NPV is $2,178,360. 2) Internal Rate of Return: The Internal Rate of Return (IRR) can

Answered by Benjamin

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