Question

Pappy's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Pappy's paid $140,000 for a marketing survey to determine the viability of the product. It is felt that Potato Pet will generate sales of $855,000 per year. The fixed costs associated with this will be $212.000 per year, and variable costs will amount to 24 percent of sales. The equipment necessary for production of the Potato Pet will cost $890,000 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 24 percent and a required return of 16 percent Calculate the Time 0 cash flow for this project. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32) Time 0 cash flow Calculate the annual OCF for this project. (Do not found intermediate calculations and round your answer to the nearest whole number,... 32) OCF 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 Calculate the NPV for this project. (Do not round intermediate calculations and round your answer to 2 decimal places, e... 32.16.) NPV Calculate the IRR for this project (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e... 32.16.)

Answer 1

To calculate the Time 0 cash flow for the project, subtract the initial investment from the present value of the expected cash flows. The annual OCF can be calculated by subtracting costs from sales. The payback period, NPV, and IRR can be calculated to evaluate the project's profitability.

Step-by-step explanation:

The time 0 cash flow for this project can be calculated by subtracting the initial investment from the present value of the expected cash flows. The initial investment includes the cost of the marketing survey ($140,000) and the equipment necessary for production ($890,000). The present value of the expected cash flows is calculated by projecting the sales, subtracting the variable and fixed costs, and discounting the resulting cash flows at the required return rate.

The annual operating cash flow (OCF) for this project can be calculated by subtracting the variable and fixed costs from the sales and then multiplying the result by (1 - tax rate). This represents the cash flow generated by the project each year after accounting for all costs and taxes.

The payback period for this project can be determined by dividing the initial investment by the annual OCF. This represents the number of years it takes for the project to recoup the initial investment.

The NPV (Net Present Value) for this project can be calculated by discounting the expected cash flows at the required return rate and subtracting the initial investment. A positive NPV indicates a favorable investment, while a negative NPV indicates an unfavorable investment.

The IRR (Internal Rate of Return) for this project can be calculated by finding the discount rate that makes the present value of the expected cash flows equal to the initial investment. The IRR represents the rate of return generated by the project.

Answer 2

Calculations for this business project include the initial Time 0 cash flow, annual OCF, payback period, NPV, and IRR. They account for factors like equipment cost, marketing survey, sales revenue, variable costs, fixed costs, tax rate, and required return rate.

Step-by-step explanation:

To calculate the Time 0 cash flow for Pappy's Potato project, we must consider any upfront costs that are incurred at the beginning of the project. In this case, the initial investment in equipment worth $890,000 and the marketing survey costs $140,000, which sum up to give a Time 0 cash flow of -$1,030,000.

The annual Operating Cash Flow (OCF) can be calculated using the formula OCF = (Sales - Variable Costs - Fixed Costs) * (1 - Tax Rate) + Depreciation * Tax Rate. With sales generating $855,000, variable costs at 24% of sales, fixed costs of $212,000, a tax rate of 24%, and annual depreciation of $222,500 = $890,000 / 4 (straight-line depreciation over four years), we can plug in these values to find the annual OCF.

To determine the payback period, we look at the time it takes for the project to recover its initial cash outflows from its net cash inflows. Since the OCF is the same each year, we divide the initial investment by the annual OCF to find the payback period.

The Net Present Value (NPV) is calculated by discounting the projected cash flows back to the present value using the required return of 16% and subtracting the initial investment. If NPV is positive, the project is considered viable.

To find the Internal Rate of Return (IRR), we search for the discount rate that makes the NPV of the project equal to zero. At this rate, the project neither loses value nor gains: it breaks even.