Task1. Pappy’s Potato has come up with the 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 $575,000 per year. The fixed costs associated with this will be $179,000 per year, and variable costs will amount to 20 percent of sales. The equipment necessary for production of the Potato Pets will cost $620,000 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 percent tax bracket and has a required return of 13 percent. Calculate the payback period, NPV, and IRR.
Task2. You wish for that your portfolio beta is to be 1.112. Currently, your portfolio comprises $200 invested in stock A with the beta of 1.7 and $300 in stock B with a beta of .5. You have another $400 to invest and want to divide it between an asset with the beta of 1.7 and a risk-free asset. How much should you invest in risk-free asset?