Aunt Sally's Sauces Inc., is consideringexpansion into a new line of all-natural,cholesterol-free, sodium-free, fat-free, low-calorie tomato sauces. Sally has paid $5,000 fora marketing study which indicates that the newproduct line would have sales of $870,000 peryear for the next six years. Manufacturing plantand equipment would cost $600,000 and will bedepreciated using the following annualdepreciation rates: 0.2, 0.32, 0.1920, 0.1152,0.1152, 0.0576. The fixed assets will have nomarket value at the end of six years. Annualfixed costs are projected at $80,000 andvariable costs are projected at 28% of sales. Netoperating working capital requirements are$75,000 for the six-year life of the project; theoutlay for working capital will be recovered atthe end of six years. Aunt Sally's tax rate is 25%and the firm requires a 5% return. The NPV ofthis project is $

⏹️ Approach to solving the question: To calculate the Net Present Value (NPV) of Aunt Sally's…

Answered: Aunt Sally's Sauces Inc., is…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Pharoah Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company's current truck (not the least of which is that it runs). The new truck would cost $56,800. Because of the increased capacity, reduced maintenance costs, and increased fuel economy, the new truck is expected to generate cost savings of $8,000. At the end of 8 years, the company will sell the truck for an estimated $27,500. Traditionally the company has used a rule of thumb that a proposal should not be accepted unless it has a payback period that is less than 50% of the asset's estimated useful life. Larry Newton, a new manager, has suggested that the company should not rely solely on the payback approach, but should also employ the net present value method when evaluating new projects. The company's cost of capital is 8%. Click here to view PV table. (a) Compute the cash payback period and net present value of the proposed investment. (If the net present value is…
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