To compute present value and internal rate of return for a new product line. Aunt Sally's Sauces Inc., is considering expansion into a new line of all-natural, cholesterol-free, sodium-free, fat-free, low-calorie tomato sauces. Sally has paid $50,00 for a marketing study which indicates that new product line would have sales of $650,000 per year for each of the next six years. Manufacturing plant and equipment would cost $500,000 and will be depreciate according to ACRS as a five-year asset. The fixed assets will have no market value at the end of six years. Annual fixed costs are projected at $80,000 and variable costs are projected at 60% of sales. Net working capital requirement are $75,000 for next six-years life of the project; the outlay for working capital will be recovered at the end of six year. Aunt Sally's tax rate is 34% and the firm requires 16% return. Compute present value and the internal rate or return for the new product line.
1. Compute the net present value for the new product line
2. Compute the internal rate of return for the new product line
3. Use the tax-shield approach to compute the operating cash flow for years 1 through 6