Question

Pappy's Potato has come up with a new product, the Potato Pet that they are considering launching. The company has determined they will need a fixed asset investment at the beginning of the project of $260,000. This asset will last for four years which is the life of the project. Also, they will need to have more net working capital (NWC) of which they have estmated an amount of $16,500 for this purpose. The NWC will be recovered when the project is over. The Accounting Department has indicated that the depreciation method to be used for the fixed asset is the straight-line method over the life of the project and the asset is depreciated to a zero book value. Even though the asset is depreciated to a zero book value, the company estimates it will have a salvage value at the end of the project of $50,000. The OCF (operating cash flow) for each year of the project is estimated to be $82,500. The appropriate discount rate and tax rate to use for this analyis is 12 percent and 21 percent, respectively. Calculate the NPV (net present value) of this Potato Pet project.

Answer #1

Assuming end of year cash flows:

Assuming cash flows occur in the middle of the year (mid year convention)

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $155,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $870,000 per year. The
fixed costs associated with this will be $218,000 per year, and
variable costs will amount to 22 percent of sales. The equipment
necessary for production of the Potato Pet will cost $920,000 and
will...

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $145,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $860,000 per year. The
fixed costs associated with this will be $214,000 per year, and
variable costs will amount to 18 percent of sales. The equipment
necessary for production of the Potato Pet will cost $900,000 and
will...

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $185,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $900,000 per year. The
fixed costs associated with this will be $230,000 per year, and
variable costs will amount to 18 percent of sales. The equipment
necessary for production of the Potato Pet will cost $980,000 and
will...

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $210,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $925,000 per year. The
fixed costs associated with this will be $240,000 per year, and
variable costs will amount to 20 percent of sales. The equipment
necessary for production of the Potato Pet will cost $1,030,000 and
will...

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...

oints 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...

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $125,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $580,000 per year. The
fixed costs associated with this will be $184,000 per year, and
variable costs will amount to 20 percent of sales. The equipment
necessary for production of the Potato Pet will cost $630,000 and
will...

Pappy’s Potato has come up with a new product, the Potato Pet
(they are freeze-dried to last longer). Pappy’s paid $124,000 for a
marketing survey to determine the viability of the product. It is
felt that Potato Pet will generate sales of $579,000 per year. The
fixed costs associated with this will be $183,000 per year, and
variable costs will amount to 18 percent of sales. The equipment
necessary for production of the Potato Pet will cost $628,000 and
will...

A project with a life of 7 has an initial fixed asset
investment of $23,520, an initial NWC investment of $2,240, and an
annual OCF of –$35,840. The fixed asset is fully depreciated over
the life of the project and has no salvage value.
If the required return is 14 percent, what is the project's
equivalent annual cost, or EAC?

A project with a life of 9 has an initial fixed asset
investment of $22,260, an initial NWC investment of $2,120, and an
annual OCF of –$33,920. The fixed asset is fully depreciated over
the life of the project and has no salvage value.
If the required return is 11 percent, what is the project's
equivalent annual cost, or EAC?

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