4. Braden Aggregates Ltd. is contemplating to market a new product. The sales manager believes that the Company could sell 8,540 bags per year of the new product at a selling price of $19.75 per bag for the next five years. The production manager has determined that machinery costing $175,050 and having a five year life would be required. The new machinery would have fixed annual operating costs of $8,400. Variable costs per bag would be $13.10. The Company uses straight line depreciation, has a tax rate of 30% and a cost of capital of 6.25%. Calculate: (12 points)

1. The increase in annual net income (net profit after income tax) and in annual cash flow expected from the investment.

2. The payback period.

3. The net present value of the investment.

4. The IRR of the investment.

5. The profitability index of the investment.

6. Repeat questions d and e above assuming a $10,750 salvage value at the end of the useful life of the machinery.

7. Make a recommendation on the economic viability of this investment.