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Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-died to last longer). Pappy's paid $120,000 for a marketing survey

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-died 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 $725,000 per year. The fixed costs associated with this will be $187,000 per year, and variable costs wil amount to 25 percent of sales. The equipment necessary for production of the Potato pet will cost $835,000 and will be depreicated in a straight-line manner for the four years of the product life (as with all fads, it is felt that sales will end quickly). This is the only intial cost for the production.. Pappy's is in a 40% tax bracket and has a required return of 13 percent. Calculate the payback period, NPV and IRR. Use template attached.

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E F G 4 0 A D Pro Forma Income Statement Year 0 2 Sales Variable Costs Gross Prot Fixed Costs Depreciation EBIT 0 Taxes 0 0 10 Net Income 0 0 11 12 Cash Flows 13 Operating Cash Flow 14 Changes in NWC 15 Net Capital Spending 16 Cash Flow F 0 0 17 18 Net Present $0.00 19 IRR #NUMI 0 0 0 0 0 0 21 22 23 24 25

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