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    Pappy's Potato: Project Cash Flows, calculate payback period, NPV, and IRR

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    Pappy's Potato has come pu with a new product, the Pet Potato (they are freeze-dried to last longer). Pappy's paid $120,000 for a marketing survey to determine the viability of the product. It is felt that Pet Potato will generate sales of $270,000 per year. The fixed costs associated with this will be $115,000 per year, and variable costs will amount to 30 percent of sales. The equipment necessary for production of the Potato Pets will cost $200,000 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 40% tax bracket and has a required return of 9%. Calculate the payback period, NPV, and IRR.

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    Solution Summary

    The solution presents a table of cash flows, the formulas to make the calculations, and the solutions to the problem.