Aunt Sally’s Foods, Inc. is a full line producer and distributor of ready to use jarred food products such as gravies and sauces.

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, sodium-free, low-calorie tomato sauces. 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 $1,900,000 per year for each of the next 6 years. However, existing product line sales will be adversely affected by about $200,000 per year. Manufacturing plant and 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 projected at $160,000 per year and variable costs are projected at 60% of sales. Also, an initial working capital outlay of $150,000 will be required which will be recaptured at the end of 6 years. Sally’s tax rate is 35% and the firm requires an 18% return. Sally also requires a 25% after tax return on an accounting basis.Based on the following criteria: 1) Net Present Value, 2) Internal Rate of Return and 3) Average Accounting Return, should Sally undertake this project?Aunt Sallyâs Foods, Inc. is a full line producer and distributor ofready to use jarred food products such as gravies and sauces. Theirproducts are well received in the marketplace competing with such brandnames as Franco-American, Ragu and Heinz. Consider the followingexpansion opportunity for Aunt Sallyâs Foods, Inc. Sally isconsidering expansion into a new line of all natural, cholesterol free,sodium-free, low-calorie tomato sauces. Sally has paid $100,000 for amarketing study to assist in the potential valuation. The studyindicates that the new product will have sales of $1,900,000 per yearfor each of the next 6 years. However, existing product line sales willbe adversely affected by about $200,000 per year. Manufacturing plantand equipment will cost $1,100,000 and will be depreciated on thestraight-line method with no salvage value at the end of 6 years. Annualfixed costs are projected at $160,000 per year and variable costs areprojected at 60% of sales. Also, an initial working capital outlay of$150,000 will be required which will be recaptured at the end of 6years. Sallyâs tax rate is 35% and the firm requires an 18% return.Sally also requires a 25% after tax return on an accounting basis. Based on the following criteria: 1) Net Present Value, 2) Internal Rateof Return and 3) Average Accounting Return, should Sally undertake this project?

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