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

Question

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy' s paid $127,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $582,000 per year. The fixed costs associated with this will be $186,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $634,000 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 12 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).) 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).) 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

1. the year 0 cash flow is considered is 634,000. The marketing survery cost of 127,000 is considered as a sunk costs and is not included in the analysis. Hence Time 0 cash flow = 634,000

2. the operating cash flow is calculated as per the table shown below:

The operating Cash flow per year (annual)= $253,122.00

3.The payback period is calculated in the table shown below:

Payback period = 2 + 163,756/235,122 = 0.696 = 2.696 =2.70 years

4 The NPV and IRR is calculated as follows:

NPV = $80,147.65

IRR = 17.88%

Year 0 1 2 3 4 Production Equipment -634000 Sales 582000 582000 582000 582000 Variable costs 128040 128040 128040 128040 Fixed Costs 186000 186000 186000 186000 Depreciation 158500 158500 158500 158500 Profit Before tax 109460 109460 109460 109460 Tax at 30% 32838 32838 32838 32838 Profit after tax 76622 76622 76622 76622 Add back: depreciation 158500 158500 158500 158500 Operating Cash flow (OCF) 235122 235122 235122 235122

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.