Aunt Sally’s Foods, Inc. Case


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, low sodium, low-calorie tomato sauces. Sally has paid $250,000 for a marketing study to assist in this opportunity and other potential valuations.

The study indicates that the new product will have sales of $2,100,000 per year for each of the next 6 years. However, existing product line sales will be reduced by $600,000 per year. Manufacturing plant and equipment will cost $1,200,000 and will be depreciated on the straight-line method to zero with a 15% salvage (market) value at the end of 6 years. Annual fixed costs are projected at $140,000 per year and variable costs are projected at 50% of sales. Also, an initial working capital outlay of $250,000 will be required which will be recaptured at the end of the 6 years. Sally’s tax rate is 30% and the firm requires an 18% return.

Based on the following criteria: 1) Net Present Value, and 2) Internal Rate of Return, should Sally undertake this project? (Please round to the nearest dollar on all calculations)

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