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 $138,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $593,000 per year. The fixed costs associated with this will be $197,000 per year, and variable costs will amount to 19 percent of sales. The equipment necessary for production of the Potato Pet will cost $656,000 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 30 percent tax bracket and has a required return of 15 percent. Requirement 1: Calculate the payback period for this project. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Payback period years Requirement 2: Calculate the NPV for this project. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ Requirement 3: 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).) IRR %

Explanation / Answer

Particulars/Year 0 1 2 3 4 Sales(A) 593000 593000 593000 593000 Fixed Cost(B) 197000 197000 197000 197000 Variable Cost=0.19*Sales 112670 112670 112670 112670 Depriciation=656000/4(D) 164000 164000 164000 164000 Income before Tax(A-B-C-D)=E 119330 119330 119330 119330 Tax@30%=0.30*E 35799 35799 35799 35799 Income after Tax 83531 83531 83531 83531 Add:Depriciation 164000 164000 164000 164000 Net Inflow 247531 247531 247531 247531 PV@13% 219054 109527 73017.99 54763.5 Cumulative Inflow PV 219054 328581 401599 456362.5 Initial Investmnt in equipment 656000 Marketing Survey 138000 Total Outflow -794000 Cumulative Cash Flow -794000 -574946 -246365 155233.9 611596.4 Payback Period =2+246365/401599 2.613 NPV 611996 At IRR=-794000+247531/(1+F1)+247531/((1+F1)^2)+247531/((1+F1)^3)+247531/((1+F1)^4)=0 , where F1=IRR,solving we get 0.0945 9.45%

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