Pappy\'s Potato has come up with a new product, the Potato Pet (they are freeze-
ID: 2731342 • 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. Required: 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).) Time 0 cash flow $_______Calculate the annual OCF for this project. (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) OCF $_______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 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
Solution.
1. Time zero cash flow for the project .
Cost of survey = $136,000.
Cost of equipment = $652,000
Total Cash flow at 0 time = $788,000.
2. Calculation of annual OCF of the project.
3. Payback period.
= 3 + $39,731 / $249,423 = 3.15 year.
4. Calculation of NPV
5. Calculation of IRR.
( Use Excell Formula for IRR )
Particular Amount Sales 591,000.00 Variable cost (124,110.00) 21% of sales Contribution margin 466,890.00 Fixed cost (195,000.00) Depreciation (197,000.00) 788,000 / 4 EBIT 74,890.00 Tax @ 30% (22,467.00) 74,890 * 30% EAT 52,423.00 Depreciation 197,000.00 Addition OCF 249,423.00Related Questions
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