Net income....
Revenue: 589,000
less fixed cost: 193,000
less variable: 589,000 * 0.18 = 105,020
less depreciation: 648,000 / 4 = 162,000
Net income after taxes: (589,000 - 193,000 - 105,020 - 162,000) * (1 - 0.35) = 83,837
Cash flow "CF": NI-AT + depreciation (a non cash expense) = 83,837 + 162,000 = $245,837
Payback period: 648,000 / 245,837 = 2.6589 years
NPV: (648,000) + PVoa of the cash flows (OR CF1/1.15 + CF2 / 1.15^2 + ...etc..out to 4 years)
PVordinary annuity "PVoa"...
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 245,837[(1 - (1 / 1.15^4)) / 0.15]
= 245,837[(1 - 0.57175) / 0.15]
= 245,837[2.85498]
= 701,859.32
NPV: $53,859.32
IRR (use financial calculator or spreadsheet): 19.0532%
Any help would be much appreciated!
Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $134,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $589,000 per year. The fixed costs associated with this will be $193,000 per year, and variable costs will amount to 18 percent of sales. The equipment necessary for production of the Potato Pet will cost $648,000 and will be depreciated in a straight-line manner for the four 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 is in a 35 percent tax bracket and has a required return of 15 percent.
Requirement 1:
Calculate the payback period for this project.
Requirement 2:
Calculate the NPV for this project.
Requirement 3:
Calculate the IRR for this project.
