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.
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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![Problem 9-22 Calculating Project Cash Flows and NPV [LO 2]
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.
a. Payback period
b. NPV
c. IRR
years
%](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F152d606a-19d5-42cc-b16b-d3ab7c31caac%2Fdeea8181-257f-409f-a396-fbc7cee18640%2Fjyao01pa_processed.png&w=3840&q=75)
Transcribed Image Text:Problem 9-22 Calculating Project Cash Flows and NPV [LO 2]
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.
a. Payback period
b. NPV
c. IRR
years
%
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