110 RO 112 Problem 3: Peggy's Peaches has developed a new product, the Bruiscless Peach, which always stays peachy fresh. Peggy's paid $85,000 to a marketing firm to survey the bruiscless peach market. The potential sales were estimated at $250,000 per year. New equipment will be necessary to carefully handle the peaches. It cost $200,000 and will have fixed costs of $70,000 per year, and variable costs will be 25% of sales. The new anti-bruise machine will be depreciated straight-line for the four years of it's life and is the only initial cost for the new "Peggy's Peaches, the UnBruised Ones". 113 Peggy's pays 34% tax and has a required retum of 8%. Calculate the NPV and IRR. 115 Solution: 116 Enter numbers and formulas to solve this problem. Use the Excel NPV and IRR functions to solve NPV and IRR.. 117 Step 1. Find the Net Income for years 1-4. 118 Depreciation (Initial cost - Salvage Value) years --> Assume Salvage Value = 0, 119 120 Net Income Year 1-4 121 Sales from problem 122 Variable Costs 25% of Sales 123 Fixed Costs from problem 124 Depreciation from H18 EBIT EBIT -Sales-costs-dep Taxes Taxes - EBIT tax rate 127 Net Income N1 - EBIT-taxes 128 129 Operating Cash Flows 130 EBIT 131 Depreciation 132 - Takes 133 After-Tax Cash Flow 134 135 After-Tax Cash Flows 136 Years CF 137 0 Cost of machine as a negative # 138 1 139 2 140 Equal Cash Flows from cell F133 3 1411 DCF 125 126 + Ready G E H 1 B Net Income Year 1-4 Sales Variable Costs Fixed Costs Depreciation EBIT Taxes from problem 25% of Sales from problem from H18 EBIT -Sales-costs-dep Taxes = EBIT tax rate NI - EBIT - taxes Net Income Operating Cash Flows EBIT +Depreciation - Taxes After Tax Cash Flow 179 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 136 137 138 139 140 141 142 143 144 145 146 147 148 149 150 151 152 153 After Tax Cash Flows Years CF 0 1 2 3 4 Cost of machine as a negative Equal Cash Flows from cell F133 Required Return Net Present Value Internal Rate of Retum required return from problem NPV - NPV trequired return cash flows) + cost IRRcash flows) IRR Check numbers: NT-$44,550, IRR-31.40%