Chapter 9 exercise

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

This preview shows pages 1–2. Sign up to view the full content.

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:

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern