Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-d

Question

Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $124,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $579,000 per year. The fixed costs associated with this will be $183,000 per year, and variable costs will amount to 18 percent of sales. The equipment necessary for production of the Potato Pet will cost $628,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy’s is in a 40 percent tax bracket and has a required return of 13 percent.

Calculate the NPV for this project. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Calculate the IRR for this project. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $124,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $579,000 per year. The fixed costs associated with this will be $183,000 per year, and variable costs will amount to 18 percent of sales. The equipment necessary for production of the Potato Pet will cost $628,000 and will be depreciated in a straight-line manner for the four years of the product life (as with all fads, it is felt the sales will end quickly). This is the only initial cost for the production. Pappy’s is in a 40 percent tax bracket and has a required return of 13 percent.

Explanation / Answer

Dep => 628000 / 4=> $157000

Variable cost => 579000 *18% => $104220

Net Income After taxes => 579000 - 104220 - 183000 - 157000) (1-40%)

=> $80868

Cash flow => Net Income After taxes + Depreciation

=> 80868 + 157000

Cash flow => $237868

Time 0 cash flow for this project => $628000

the annual OCF for this project. => $237868

NPV for this project => 237868 PVIAF (12%,4) - 628000

NPV for this project => $94405

IRR for this project=> 18.97%

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