Question

Remember to explain all your steps and to show all formulas you use before you put numbers into the equations.
-Write the formula, substitute the numbers into the formula, say what is left to compute, compute

Question 3 Use the following prompt to answer the subsections: 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 $50,000 for a marketing study which indicates that the 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 depreciated 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 requirements are $75,000 for the six-year life of the project; the outlay for working capital will be recovered at the end of six years. Aunt Sally's tax rate is 34% and the firm requires a 16% return. (3.1) Use the tax-shield approach to compute the operating cash flow for years 1 through 6. (3.2) Compute the net present value for the new product line. (3.3) Compute the internal rate of return for the new product line

Answer 1

Working capital

working capital is taken as an outflow in the initial period while it becomes in an inflow in the terminal year.

IRR

we make an approximation for IRR

We try to guess two rates and then compute two NPVs, one rate at which the npv is negative while on another rate npv should be positive. Then the interpolation formula is used to calculate IRR.

390000 222999999 Operating Cash flows. I 2 Sales 650000 65000 650000 65000 65000 650000 Less : variable cost 390000 390000 39000 390000 390000 2 (60% of sales) Less: fixed cost 80000 800D 80000 80000 80000 less Depreciation 100000 Ισοστα Του στη σηο ουσ - Profil before 80000 80000 80000 80000 80000 80000 tax 51200 27200 27200 27900 27200 - Tax @ 34% 27200 Trusoo - Profit after 52800 52800 52 800 52800 52800 tax 10000 100000 looooo 100000 100000 + Dep. 159800 152800 152800 152800 198800 CEAT 152800 P.V - 625000 NO Present value / NPV. CFAT PVP - 625000 1 152800 30 - Nm J iso 152800 152800 152800 0.862 0.743 0.641 0.552 131714 113530 97945 84346 0.476 727 33 152800 118800+ 75ooo 0.390 75582 - 49150 NPV

P.V. - Internal rate of return (IRR) Approx IRR = lower Discount & NPvat LDR X (HDR- LDR) Rate NPV at LDR- Pvat HDR - NPV at 13% Year CFAT P&F 43%t) Puf (13%,ut) - 625000 1 - 625000 0. $85 0.885 152800 0.783 119642 152800 0.893 152 800 0.613 0.693 93666 152800 0.543 0.613 82970 152800 0,543 93029 193800 0.480 5420 135228 0.783 105890 - d m sub -49150 NPV at 16% already calculated Putting unto IRR formula 13% + 5420 x (16% -13%) 5420- (-49150) 13% + 54208 3 54570 = 13.29%