We know that net sales for year t is equal to New sales less the lost sales less the lost revenue, or Net sales = Unit sales of new meal x price of new meal Reduction in unit sales of existing meal x Current price of existing meal Reduced unit sales of existing meal x price reduction in existing meal Year 1 Net Sales = 2,500,000 x $15.99 600,000 x $14.99 (950,000-600,000)*($14.99-$11.99) = $29,931,000Year 2 Net Sales = 2,000,000 x $15.99 450,000 x $14.99 (685,000-450,000)* ($14.99-$11.99) =$24,529,500 Year 3 Net Sales = 1,800,000 x $15.99 0 x $14.99 (0-0)* ($14.99-$11.99) =$28,782,000 Year 4 Net Sales = 1,650,000 x $15.99 0 x$ 14.99 (0-0)* ($14.99-$11.99) =$26,383,500 Year 5 Net Sales = 1,250,000 x $15.99 0 x $14.99 (0-0)* ($14.99-$11.99) =$19,987,500 Variable Costs = Unit sales of new meal x variable cost of new meal Reduction in unit sales of existing meal x variable cost per unit of existing mealYear 1 Variable Cost = 2,500,000*$10.5-600,000*$6 = $22,650,000Year 2 Variable Cost = 2,000,000*$10.5-450000*$6 = $18,300,000Year 3 Variable Cost = 1,800,000*$10.5 = $18,900,000Year 4 Variable Cost = 1,650,000*$10.5 = $17,325,000Year 5 Variable Cost = 1,250,000*$10.5= $13,125,000

Depreciation will be done on a seven-year MACRS schedule, the annual deprecation is below,Year 1 Depreciation = $6,500,000 * 0.1429 = $928,850Year 2 Depreciation = $6,500,000 * 0.2449 = $1,591,850Year 3 Depreciation = $6,500,000 * 0.1749 = $1,136,850Year 4 Depreciation = $6,500,000 * 0.1249 = $811,850Year 5 Depreciation = $6,500,000 * 0.0893= $580,450Net Working Capital will be 13% of the sales of that year. Therefore, Year 0 NWC = 0 (Because no initial outlay)Year 1 NWC = .13 * $29,931,000 = $3,891,030Year 2 NWC = .13 * $24,529,500 = $3,188,835Year 3 NWC = .13 * $28,782,000 = $3,741,660Year 4 NWC = .13 * $26,383,500 = $3,429,855Year 5 NWC = 0

Now we have, Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales $29,931,000.00 $24,529,500.00 $28,782,000.00 $26,383,500.00 $19,987,500.00

Variable Cost (22,650,000.00) (18,300,000.00) (18,900,000.00) (17,325,000.00) (13,125,000.00)

Fixed Costs (850,000.00) (850,000.00) (850,000.00) (850,000.00) (850,000.00)

Depreciation (928,850.00) (1,591,580.00) (1,136,850.00) (811,850.00) (580,450.00)

EBT $5,502,150.00 $3,787,920.00 $7,895,150.00 $7,396,650.00 $5,432,050.00

Taxes(35%) (1,925,752.50) (1,325,772.00) (2,763,302.50) (2,588,827.50) (1,901,217.50)

Net income $3,576,397.50 $2,462,148.00 $5,131,847.50 $4,807,822.50 $3,530,832.50

Depreciation $928,850.00 $1,591,580.00 $1,136,850.00 $811,850.00 $580,450.00

OCF $4,505,247.50 $4,053,728.00 $6,268,697.50 $5,619,672.50 $4,111,282.50

Beg NWC - $3,891,030.00 $3,188,835.00 $3,741,660.00 $3,429,855.00

End NWC (3,891,030.00) (3,188,835.00) (3,741,660.00) (3,429,855.00) -

NWC Cash Flow (3,891,030.00) 702,195.00 (552,825.00) 311,805.00 3,429,855.00

Net Cash Flow $614,217.50 $4,755,923.00 $5,715,872.50 $5,931,477.50 $7,541,137.50

The book value of the equipment is the cost less the accumulated depreciation over the 5 years of the project. So,Book value = $6,500,000-($928,850+$1,591,580+$1,136,850+$811,850+$580,450) = $1,450,420The book value is higher than the estimated market value, therefore, we need to calculate the tax credit that we be realized on the sale of the equipment. Tax Credit = (BV MC)(Tc) = ($1,450,420-$85,000)(.35) = $477,897Cash Flow from Equipment Sale = $85,000+$477,897 = $562,897Therefore, the final cash flows of the project are,Year 0 - -$6,500,000Year 1 $614,217.50Year 2 $4,755,923.00Year 3 $5,715,872.50Year 4 $5,931,477.50 Year 5 $8,104,034.50 ($7,541,137.50+$562,897)

1) The money spent to develop the new line of meals and the marketability study are both sunk costs. Whether or not they decided to proceed with the introduction of the new meals, these costs have already been incurred and cannot be recovered. Therefore, the total amount of sunk costs for this project is $150,000+$200,000 = $350,0002) As seen above, the cash flows for each year are,Year 0 - -$6,500,000Year 1 $614,217.50Year 2 $4,755,923.00Year 3 $5,715,872.50Year 4 $5,931,477.50 Year 5 $8,104,034.50 3) To determine the payback period, we consider the following,

YearCash FlowCum. Cash Flow

0-$6,500,000-$6,500,000

01$614,217.50$-5,885,782.5

2$4,755,923.00-$1,129,859.5

3$5,715,872.50$4,586,013.0

4$5,931,477.50$10,517,490.5

5$8,104,034.50 $18,621,524.5

(-$6,500,000+$614,217.5)(-$5,885,782.5+$4,755,923)(-$1,129,859.5+$5,715,872.5)($4,586,013+$5,931,477.5)($10,517,490+$8,104,034.50)

We see that the payback period is sometime between years 2 and 3. To determine the actual payback period, we have,

Payback period = 2 + $1,129,859.5/$5,715,872.5 = 2.20 years.Therefore, the project should be accepted based on payback because the max it requires is 4.

4) Profitability Index can be given as follows,PV = $614,217.5/(1+.12)+$4,755,923/(1+.12)^2+$5,715,872.5/(1+.12)^3+$5,931,477.5/(1+.12)^4+$8,104,034.50/(1+.12)^5 PV = $16,776,254.32PI = PV / Cost = $16,776,254.32/$6,500,000=2.585) Internal rate of return can be given by Excel formulas as such,YearCash FlowCum. Cash Flow

0-$6,500,000-$6,500,000

1$614,217.50-$5,885,782.5

2$4,755,923.00-$1,129,859.5

3$5,715,872.50$4,586,013.0

4$5,931,477.50$10,517,490.5

5$8,104,034.50$18,621,525.0

IRR49.66%Formula is =IRR(B2:B7)

6) Net present Value is given by,NPV = -$6,500,000+$ 614,217.5/(1+.12)+$4,755,923/(1+.12)^2+$5,715,872.5/(1+.12)^3+$5,931,477.5/(1+.12)^4+$8,104,034.50/(1+.12)^5 = $10,276,254,327) The project should be accepted based on profitability index because it is greater than 1. The required rate of return for projects 12%, therefore by the IRR rule with a IRR = 49.66%, this is a fantastic project to proceed forward with. And finally, the NPV rule states that projects with a positive NPV should be accepted and this project has a NPV that exceeds 10 million, therefore, the project should be accepted. Hence, by all rules, this project should absolutely be accepted.