Question

Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy’s paid $137,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $592,000 per year. The fixed costs associated with this will be $196,000 per year, and variable costs will amount to 22 percent of sales. The equipment necessary for production of the Potato Pet will cost $654,000 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 has a tax rate of 30 percent and a required return of 14 percent.

I just need the payback period

Calculate the payback period for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

Payback period             years not 2.08

  

Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV        30961.31 $

  

Calculate the IRR for this project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

IRR      16.29 %

Answer 1

Solution:
	Payback period = 2.78 years
Working Notes:
	Since, the survey cost is sunk cost it will be not counted in the payback period calculation
	Calculation of annual cash flow
	Sales	592,000
Less:	Variable cost	130240
	[22% x 592,000]
Less:	Fixed cost	196,000
Less:	Depreciation Expense	163,500
	[cost of equipment/life ]
	[654,000/4]
	Earnings Before tax	102,260
Less:	Tax @ 30%	30678
	Earnings after tax	71,582
	Annual cash flow = Earnings after tax + Depreciation
		=$71,582 +163,500
		=$235,082
	Payback period = Equipment cost / Annual cash flow
	=$654,000/235,082
	=2.78200798
	=2.78 years
Please feel free to ask if anything about above solution in comment section of the question.