Grime Busters Co. manufactures heavy-duty cleaning products for factories and other industrial facilities. The owners, Anita Bath and Ivan Oder, are chemical engineers who developed a unique formulation that can tackle the toughest mess. Last year, they refined this formulation and developed a product line that is safe enough for home use. They are now considering whether to produce and sell a line of home cleaning products.

After careful study, Anita and Ivan have determined the following:

• The current production line will need $140,000 in additional equipment that will be depreciated straight-line to zero over 3 years. In addition, they will need to add a second shift to manufacture the new product line.

• Other than hiring a second shift supervisor for $63,000/year, there are no other incremental fixed costs associated with this project. However, the bookkeeper's existing $60,000/year salary will be split equally between the industrial and home product lines.

• Last year, Anita and Ivan spent $75,000 researching and developing this product line. In addition, they plan to spend $25,000 at the start of the project to create the new lines brand name and packaging. They will also be spending $10,000 to train employees on the new equipment and $5,000 on an amazing launch party. For purposes of this analysis (and if you decide to include them), all of these items should be capitalized and depreciated along with the equipment.

• Year 1 sales volume is estimated at 30,000 cases and this is projected to grow 25% in year 2 and then 15% in year 3. The product will be sold to retailers for $11.25/case and cost Grime Busters $6.75/case to produce.

• No cannibalization with the existing industrial line is expected, but because production efficiencies will occur, the costs to produce the industrial product will decrease by $0.50 per gallon. Anita and Ivans projections for industrial line sales are 100,000 gallons each year.

• To finance this project, they will borrow $250,000 over 3 years at 5.98% interest, compounded annually. Annual payments will be $93,500.

• Anita and Ivan anticipate increasing inventory by $30,000, accounts receivable by $45,000 and accounts payable by $27,000. They are assuming this will occur at the start of the project and will be fully returned at the end.

• Grime Busters' tax rate is 20% and their required rate of return is 18%. In addition, they have set the payback threshold at 22 months and the average accounting return at 45%.

Anita and Ivan would like you to analyze this project over 3 years by answering the following questions:

What is the total net income and cash flow for each of the project years?

	Year 0	Year 1	Year 2	Year 3
Net Income	n/a
Total Cash Flow

Complete the following table using the specified capital budgeting tools:

	Payback (# of months)	Average Accounting Return (AAR)	Net Present Value (NPV)	Internal Rate of Return (IRR)	Profitablility Index (PI)
Calculated Value
Decision Threshold Met?	(Click to select) Yes No	(Click to select) Yes No	(Click to select) Yes No	(Click to select) Yes No	(Click to select) Yes No

What is your overall recommendation for Anita and Ivan? (Click to select) Yes, they should pursue this opportunity. No, they should not pursue this opportunity.