Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). It is expected that Potato Pet will generate sales of $575,000 per year over next four years. 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 Pet will cost $960,000 and will be depreciated to zero 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). The equipment will require an increase in working capital (spare parts inventory) of $8,000 at the beginning. Pappy’s is in a 35 percent tax bracket and has a required return of 14 percent.
[Use Excel to answer the questions. Without Excel worksheet, no credit will be earned.]
1. What is the NPV and IRR of the project? Is the project acceptable?
2. What is the breakeven price of the equipment? (What price of the equipment will make the NPV equal zero?)
Please show excel formulas