Please answer all parts of the question! Pappy\'s Potato has come up with a new

Question

Please answer all parts of the question!

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $725,000 per year. The fixed costs associated with this will be $187,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $835,000 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 payback period for this project. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) 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).)

Explanation / Answer

Requirement 1.    Payabck period = initial cash outflow / net annual cash inflow

= $835000 / $319300

   = 2.62 years

Note:-  Calulation of net annual cash inflow:

     Sales = $725000

less: Variable cost( 20% of sale) =145000

less: fixed cost = 187000

less: depreciation(835000/4) = 208750

profit before tax =184250

Less: tax 40% =73700

Profit after tax =110550

Add; depreciation = 208750

Net annual cash inflow = 319300

Requirement 2.    NPV = present value of cash inflow - present value of cash outflow

   year cash flow PVAF(13%,4year) PVF(13%,4year) Present value

   0 835000 - 1 835000

   1-4 319300 2.974 - 949598.20

   NPV = $949598.20 - $835000

= $114598.20

  

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