Silvios Sausage Factory has come up with a new line of spicy sausages. Silvio has already paid $75,000 for a marketing study to determine the viability of the product. It is believed that the new line of sausages will generate sales of $625,000 per year for four years. The fixed costs associated with the product will be $215,000 per year, and variable costs will amount to 22% of sales. The equipment necessary for production of the new sausages will cost $596,000 and will be a depreciated to zero using straight line depreciation over four years. At the end of the four years Silvio believes the equipment will have a salvage value of $45,000. Silvios Sausage paid 35% in taxes last year and has a required rate of return of 13%. What is the initial cost of the project (the cash flow at time 0)?

$671,000

$441,725

$522,000

$596,000

$625,000

What is the annual after tax operating cash flow for year 1 of the project?

$149,000.00

$80,275.00

$272,500.00

$229,275.00

$625,000.00

What is the after tax cash flow from the salvage value?

$39,150.00

$22,950.00

$29,250.00

$15,750.00

$45,000.00

What is the payback period for the project?

2.9 yrs.

3.7 yrs.

3.3 yrs.

2.1 yrs.

2.6 yrs.

What is the NPV of the project?

$76,417.59

$28,911.49

$48,431.45

$103,911.49

$116,477.21

Silvios Sausage Factory has come up with a new line of spicy sausages. Silvio has already paid $75,000 for a marketing study to determine the viability of the product. It is believed that the new line of sausages will generate sales of $625,000 per year for four years. The fixed costs associated with the product will be $215,000 per year, and variable costs will amount to 22% of sales. The equipment necessary for production of the new sausages will cost $596,000 and will be a depreciated to zero using straight line depreciation over four years. At the end of the four years Silvio believes the equipment will have a salvage value of $45,000. Silvios Sausage paid 35% in taxes last year and has a required rate of return of 13%. What is the IRR of the project?

13.9%

21.0%

15.0%

24.4%

16.4%

Would you recommend that Silvio invest in the project?

Yes

No