Reference no: EM132790167

Questions -

Q1. Patti's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Six months ago Patti's paid $120,000 for a marketing survey which suggested that the new product would be viable. It estimated that Potato Pet will generate sales of $725,000 per year. The fixed cost associated with this will be $187,000 per year, and variable cost will amount to 20 percent of sales.

The equipment necessary for production of the Potato Pet will cost $835,000 and will be depreciated to zero in a straight-line manner for four years of the project life (as with all fads, it is felt that sales will end quickly). This is the only initial cost for the production.

Patti's is in a 40 percent tax bracket and has a required return of 13%.

What is the initial outlay that will be incurred if Patti's decides to move forward with this project?

a. $187,000

b. $208,750

c. $332,000

d. $835,000

e. $955,000

Q2. Patti's Potato has come up with a new product, the Potato Pet (they are freeze-dried to last longer). Six months ago Patti's paid $120,000 for a marketing survey which suggested that the new product would be viable. It estimated that Potato Pet will generate sales of $725,000 per year. The fixed cost associated with this will be $187,000 per year, and variable cost will amount to 20 percent of sales.

The equipment necessary for production of the Potato Pet will cost $835,000 and will be depreciated to zero in a straight-line manner for four years of the project life (as with all fads, it is felt that sales will end quickly). This is the only initial cost for the production.

Calculate the annual operating cash flow (OCF) for this project:

a. $110,550

b. $184,550

c. $319,300

d. $393,000

e. $725,000