Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $180,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $895,000 per year. The fixed costs associated with this will be $228,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $970,000 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 has a tax rate of 22 percent and a required return of 16 percent. a. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. Calculate the IRR for this project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. > Answer is complete but not entirely correct. a. Payback period b. NPV c. IRR 2.39 years $ 165,713.00 × 20.53 x %
Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $180,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $895,000 per year. The fixed costs associated with this will be $228,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $970,000 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 has a tax rate of 22 percent and a required return of 16 percent. a. Calculate the payback period for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. b. Calculate the NPV for this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. c. Calculate the IRR for this project. Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. > Answer is complete but not entirely correct. a. Payback period b. NPV c. IRR 2.39 years $ 165,713.00 × 20.53 x %
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
mni.3
Transcribed Image Text:Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $180,000 for a
marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $895,000 per year. The fixed
costs associated with this will be $228,000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary
for production of the Potato Pet will cost $970,000 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 has a tax rate of 22
percent and a required return of 16 percent.
a. Calculate the payback period for this project.
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
b. Calculate the NPV for this project.
Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.
c. Calculate the IRR for this project.
Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.
> Answer is complete but not entirely correct.
a. Payback period
b. NPV
c. IRR
2.39
years
$
165,713.00 ×
20.53 x %
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