The Great Outdoors Company sells outdoor furniture. You are the manager of The Great Outdoors Company and are evaluating whether to invest in a new product line which will generate sales for 7 years.You would invest in the new product line if there is a 3 year payback period.

From the best estimates of the marketing and production managers, annual cash sales for this new line are 100,000 units at $50 per unit. Variable costs will be 55% of the selling price. Cash fixed costs of $1,750,000 will be incurred per year.

The Great Outdoors Company will need to increase working capital by $150,000.

The upfront investment is $1,745,000.

At the end of the 7-years, the assets will be sold for their residual value of $490,000.

The required rate of return is 12%.

Requirement

1. Calculate the NPV.
2. Conclude on whether the new product line should be undertaken based on the NPV.
3. Calculate the IRR.
4. Calculate the payback period.
5. Conclude on whether the new product line should be undertaken based on the payback period.
6. Calculate the simple rate of return.
7. Conclude on whether the new product line should be undertaken based on the simple rate of return.