Pappys Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). It is expected that Potato Pet will generate annual sales of $575,000 over 4 years. The fixed costs associated with this will be $179,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pet will cost $920,000 and falls in the MACRS five-year class. It will have a salvage value of $50,000 at the end of 4 years. The equipment will require an increase in working capital (spare parts inventory) of $7,500 at the beginning. Pappys is in a 34 percent tax bracket and has a required return of 12 percent.

MACRS 5-Year Class

Year 1: 20%

Year 2: 32%

Year 3: 19.2%

Year 4: 11.52%

Year 5: 11.52%

Year 6: 5.76%

[Use Excel to answer the questions. Without Excel worksheet, no credit will be earned.]

4. What is the breakeven annual sales? (What level of the annual sales will make the NPV equal zero?)