Problem: Pappy’s Potato has come up with the new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $120,000 for a marketing survey to find out the viability of product. It is felt that Potato Pet will make sales of $725,000 per year. The fixed costs allocated with this will be $187,000 per year, and variable costs will amount to 20 percent of sales. The equipment required for production of the Potato Pet will cost $835,000 and will be depreciated in a straight-line value basis for the 4 years of the product life (as with all fads, it is felt the sales will end rapidly). This is the only initial cost for the production. Pappy’s is in 40 percent tax bracket and has required return of 13 percent.
problem1. Compute the payback period for this project
problem2. Compute the NPV for this project
problem3. Compute the IRR for this project