Question

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 $185,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $900,000 per year. The fixed costs associated with this will be $230,000 per year, and variable costs will amount to 18 percent of sales. The equipment necessary for production of the Potato Pet will cost $980,000 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 23 percent and a required return of 13 percent. a. Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) c. Calculate the IRR for this project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) years a. Payback period b. NPV c. IRR

Answer 1

Payback	2.01
NPV	431105.66
IRR	34.55%

Workings: OCF

Revenues	900000
Less: Production cost	162000
Fixed costs	230000
Depreciation	245000
Profit before tax	263000
Less:Tax	60490
Net Income	202510
Add Depreciation	245000
OCF	447510

Year	Cash flow	Cumulative CF
0	-900000	-900000
1	447510	-452490
2	447510	-4980
3	447510	442530
4	447510	890040

AutoSave © ct - Book1 - Excel Sign in Formulas Data Review View = = pun Help - e General $ -% - 0 Share Commen AY O Sort & Find & Filter - Select Tell me what you want to do 2 P2 P 3 Conditional Format as Cell Formatting Table - Styles Styles insert - Ex Delete - J File Home Insert Draw Page Layout Calibri - 11 -AA = Paste BIU - B. A. Clipboard Font 5 H2 - X f Revenues H Format - - Alignment Number Cells Editing NO Revenues 900000 Less: Production cost =18%*12 Fixed costs 230000 Depreciation =980000/4 Profit before tax =12-SUM(13:15) Less:Tax =16*23% Net Income =16-17 Add Depreciation =15 OCF =19+18 KL Year Cash flow -900000 447510 447510 447510 447510 Cumulative CF =L2 =M2+L3 =M3+L4 =M4+L5 =M5+L6 mt Payback =K4-M4/L5 NPV =NPV(13%,L3:L6)+L2 IRR =IRR(L2:L6)