Pringles Potato has come up with a new product, the Potato Pet (they are freeze dried to last longer) To determine the viability of the product, Pringles paid $150,000 for a marketing survey It is assumed that Potato Pet will generate sales of $915,000 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 5 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 Pringles has a tax rate of 40 percent and a required return of 14 percent Compute the payback period, NPV, and IRR 10 marks Fast Printing is considering the purchase of a new printing press The total installed cost of the press is $2 2 million This outlay would be partially offset by the sale of an existing press The old press has zero book value, cost $1 million 10 years ago, and can be sold currently for $1 3 million before taxes As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1 8 million higher than with the existing press, but product costs (excluding depreciation) will represent 50 of sales The new press will not affect the firms net working capital requirements The new press will be depreciated under MACRS, using a 5 year recovery period The firm is subject to a 40 tax rate Fast Printings cost of capital is 11 (Note Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6 ) 15 marks Compute the initial investment required by the new press 2 marks Compute the operating cash flows attributable to the new press (Note Be sure to consider the depreciation in year 6 ) 6 marks Compute the payback period 2 marks Compute the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press 4 marks Make a recommendation to accept or reject the new press, and justify your answer 1 marks

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 11, 2024

Pringles Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). To determine the viability of the product,

Pringles Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). To determine the viability of the product, Pringles paid $150,000 for a marketing survey. It is assumed that Potato Pet will generate sales of $915,000 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 5 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. Pringles has a tax rate of 40 percent and a required return of 14 percent. Compute the payback period, NPV, and IRR. [10 marks]
Fast Printing is considering the purchase of a new printing press. The total installed cost of the press is $2.2 million. This outlay would be partially offset by the sale of an existing press. The old press has zero book value, cost $1 million 10 years ago, and can be sold currently for $1.3 million before taxes. As a result of acquisition of the new press, sales in each of the next 5 years are expected to be $1.8 million higher than with the existing press, but product costs (excluding depreciation) will represent 50% of sales. The new press will not affect the firms net working capital requirements. The new press will be depreciated under MACRS, using a 5-year recovery period. The firm is subject to a 40% tax rate. Fast Printings cost of capital is 11%. (Note: Assume that the old and the new presses will each have a terminal value of $0 at the end of year 6.)

[15 marks]

Compute the initial investment required by the new press. [2 marks]
Compute the operating cash flows attributable to the new press. (Note: Be sure to consider the depreciation in year 6.) [6 marks]
Compute the payback period. [2 marks]
Compute the net present value (NPV) and the internal rate of return (IRR) related to the proposed new press. [4 marks]
Make a recommendation to accept or reject the new press, and justify your answer.

[1 marks]