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.]

1a. Compute the NPV and IRR of the project. Is the project acceptable?

1b. Compute the PI and payback period of the project.

1c. Do the following analyses:

1. What if the sales level is 25% higher than the current estimate? Compute the NPV and IRR of the project.
2. What if the sales level is 50% higher than the current estimate? Compute the NPV and IRR of the project.
3. What if the sales level is 25% lower than the current estimate? Compute the NPV and IRR of the project.
4. What if the sales level is 50% lower than the current estimate? Compute the NPV and IRR of the project.

1d. What is the breakeven annual sales? (What level of the annual sales will make the NPV equal zero?)