Pappy’s Potato has come up with a new product, the Potato Pet (they are freeze-dried to...

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Pappy’s Potato has come up with a new product, the Potato Pet(they are freeze-dried to last longer). Pappy’s paid $138,000 for amarketing survey to determine the viability of the product. It isfelt that Potato Pet will generate sales of $593,000 per year. Thefixed costs associated with this will be $197,000 per year, andvariable costs will amount to 19 percent of sales. The equipmentnecessary for production of the Potato Pet will cost $656,000 andwill be depreciated in a straight-line manner for the four years ofthe product life (as with all fads, it is felt the sales will endquickly). This is the only initial cost for the production. Pappy'shas a tax rate of 30 percent and a required return of 15percent.
What is the IRR?

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The amount paid for the marketing survey will be treated as sunkcost because this cost is already incurred and will have See Answer

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Pappy’s Potato has come up with a new product, the Potato Pet(they are freeze-dried to last longer). Pappy’s paid $138,000 for amarketing survey to determine the viability of the product. It isfelt that Potato Pet will generate sales of $593,000 per year. Thefixed costs associated with this will be $197,000 per year, andvariable costs will amount to 19 percent of sales. The equipmentnecessary for production of the Potato Pet will cost $656,000 andwill be depreciated in a straight-line manner for the four years ofthe product life (as with all fads, it is felt the sales will endquickly). This is the only initial cost for the production. Pappy'shas a tax rate of 30 percent and a required return of 15percent.What is the IRR?