Question

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $195,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $910,000 per year. The fixed costs associated with this will be $234,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $1,000,000 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 25 percent and a required return of 15 percent Calculate the Time 0 cash flow for this project. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g. 32.) Time 0 cash flow

Answer 1

18 X fix =IRR(L2:26) E A B C M о 1 Year Revenue Costs 2 ol 3 1 $910,000 $434,200 4. 2 $ 910,000 $434,200 5 3 $910,000 $434,200 4 $910,000 $434,200 D F G H I K L Cash flows Depreciati Depreciati from Total cash on PBT Tax@25% PAT Lon operations Investment flows $(1,000,000) $ (1,000,000) $ 250,000 $ 225,800 $ 56,450 $169,350 $ 250,000 $ 419,350 $ 419,350 $ 250,000 $225,800 $ 56,450 $169,350 $ 250,000 $ 419,350 $ 419,350 $ 250,000 $225,800 $ 56,450 $169,350 $ 250,000 $ 419,350 $ 419,350 $ 250,000 $ 225,800 $ 56,450 $169,350 $ 250,000 $ 419,350 $ 419,350 PVIF@15% 1.000 $ 0.870 $ 0.756 $ 0.658 $ 0.572 $ N Cumulative cash flows Present value Simple (1,000,000.00) $ (1,000,000) 364,652.17 $ (580,650)| 317,088.85 $ (161,300) 275,729.43 $ 258,050 239,764.72 $ 677,400 7 IRR 24.46% NPV $ 197,235.18 Payback period 2.38 Years =2+161300/419350 15 Time 0 cash flow | 16 OCF -$1,000,000 419,350 $

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