Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last
Question:
Pappy's Potato has come up
with a new product, the Potato Pet (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 Potato Pet will generate sales of $815,000 per year.
The fixed costs associated with this will be $196,000 per year, and variable
costs will amount to 20 percent of sales. The equipment necessary for
production of the Potato Pet will cost $865,000 and will be depreciated in a
straight-line manner for the 4 years of the product life (as with all fads, it is
felt the sales will end quickly). This is the only initial cost for the
production. Pappy's has a tax rate of 40 percent and a required return of
13 percent. Calculate the payback period, NPV, and IRR.