Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $130,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $845,000 per year. The fixed costs associated with this will be $208,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $870,000 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 14 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.) Payback period a. years b. NPV c. IRR %

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $130,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $845,000 per year. The fixed costs associated with this will be $208,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $870,000 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 14 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.) Payback period a. years b. NPV c. IRR %

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter12: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 16P: REPLACEMENT CHAIN The Fernandez Company has an opportunity to invest in one of two mutually...

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c. What is the IRR, and what would be the decision based on the IRR? (Round answer to 2 decimal places, e.g. 15.25.) The IRR of the project is %, and using the IRR rule the project should be Click if you would like to Show Work for this question: Open Show Work rejected accepted
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