Chapter 9 exercise

Chapter 9 exercise - Pappy?s Potato has come up with a new...

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Pappy ?s Potato has come up with a new product, the Pet Potato (they are freeze-dried to last longer). Pappy?s paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Pet Potato will generate sales of $380,000 per year. The fixed costs associated with this will be $145,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pets will cost $240,000 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 only initial cost for the production. Pappy?s is in a 40 percent tax bracket and has a required return of 13 percent. Calculate the payback period, NPV and IRR. First of all we need to calculate the initial investment: In this case the total initial investment (I) is the sum of the marketing survey plus invests in plant and equipment: I = $120,000 + $240,000 = $360,000 The next step is to calculate the cash flow for each year:
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