Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-d
ID: 2770263 • 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 $132,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $587,000 per year. The fixed costs associated with this will be $191,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $644,000 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.
Explanation / Answer
Total Present value of operating cash flow = 347802 * Annuity factor for 4 years @ 13% i.e. 2.974 = $1,034,363
Present value of cash outflow = $776,000
Net Present value from the new product = 1034363 - 776000 = $258,363
So launching new product Potato pet is viable.
Satement of Net Income Sl no Operation Amount Remarks i Sales $ 5,87,000.00 ii Less: Variable Cost i*22% $ 1,29,140.00 iii Contribution ii-i $ 4,57,860.00 iv Less: Fixed Cost $ 1,91,000.00 It is assumed that depreciation is included in Fixed Cost v Net Income before tax iii-iv $ 2,66,860.00 vi Less: Taxes v*30% $ 80,058.00 vii Net Income after tax $ 1,86,802.00Related Questions
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