Pappy\'s Potato has come up with a new product, the Potato Pet (they are freeze-
ID: 2731231 • Letter: P
Question
Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $136,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $591,000 per year. The fixed costs associated with this will be $195,000 per year, and variable costs will amount to 21 percent of sales. The equipment necessary for production of the Potato Pet will cost $652,000 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 13 percent. Calculate the Time 0 cash flow for this project. (Do not round intermediate calculations. Enter a negative sign when necessary. Round your answer to the nearest whole number (e.g., 32).) Calculate the annual OCF for this project. (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) 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 Calculate the NPV for this project. (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV 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
a)Time 0 cash flow = $652000
b)Annual operating cash flows
Sales
$591000
less: variable costs
$124110
$466890
less: depreciation
$163000
less: fixed costs
$195000
Pretax Income
$108890
less: taxes
$32667
Net income
$76223
Add: Depreciation
$163000
Cash flow from operations
$239223
c) Payback period
Payback Period =
Initial Investment
Cash Inflow per Period
=$652000/$239223
=2.73 years
d)
Cash Inflows
$239223
Annuity factor for 4 years @13%
2.97
(239223 x 2.97 )
$710492
PV of cash out flow
$ 652,000.00
PV of cash in flow
$ 710,492.00
NPV
$ 58,492.00
b)Annual operating cash flows
Sales
$591000
less: variable costs
$124110
$466890
less: depreciation
$163000
less: fixed costs
$195000
Pretax Income
$108890
less: taxes
$32667
Net income
$76223
Add: Depreciation
$163000
Cash flow from operations
$239223
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