Capital Budgeting Question

[corpfinancefinal]

I was very sick the past 3 weeks and had to miss my Corporate Finance class that is once a week. Our final is now due, and i am entirely lost. I did all of the essay questions, I am now having extreme difficulty with the problem. Please help!

I need to find NET PRESENT VALUE, INTERNAL RATE OF RETURN (IRR), AND AVERAGE ACCOUNTING RETURN given the following question:

Aunt Sally's Food Inc. is considering expansion. 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 $1,500,000 per year each year for the next 6 years. However, existing product line sales will be adversely affected by about $200,000 per year. 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 $160,000 per year and variable costs are 60% of annual sales. Also, initial working capital outlay of $150,000 will be required which will be recaptured at the end of the 6 years. Sally's tax rate is 35%. The firm requires an 18% return. Sally also requires a 25% after tax return on an accounting basis.

I appreciate any help I can get!

 

[tkhunny]

You need a spreadsheet. Set up each cash flow in a separate column. By the time you get them all built, you should see the solution. You will need a present value accumulator to include all the cash flows. Put that in another column. Then a "goal seek" function should find the IRR for you.