# answer the questions 468

*Its highly recommended that you use Excel to solve this.

HappyPups makes pet cameras and will be introducing their newest product, the Furbo. The Furbo is a camera that allows dog owners to check in on their pup, give their pup a treat, and talk to them while they are away. HappyPups spent $375,000 on consumer demand studies and an additional $40,000 on research and development to get the perfect product for all pet lovers. Each Furbo will sell for $195. It is expected that Furbo product will generate additional revenue from the sale of treats that are compatible with device. It is expected that 50% of Furbo purchases will result in an additional $15 net profit from treat sales at time of purchase. The Furbo has a variable cost of $125.00, and the project will incur an annual fixed cost of $1,400,000 each year. HappyPups will need to purchase a new machine to manufacture the Furbo for $2,000,000, and will be depreciated using the 3-yr MACRS schedule. HappyPups anticipates it will be able to sell the machine for $750,000 at the end of the project in three years. In order to promote the product, HappyPups will initially set aside $1,000,000 worth of inventory at the beginning of the project and will readjust NWC levels to reflect 10% of Furbo Sales (not including the treats). All inventory will be liquidated at the end of project. However, by introducing the Furbo, HappyPups anticipate that will take away roughly $1,000,000 in revenue each year from its existing pet camera line. The required return for the project is 20%, and the tax rate is 21%

- Spent $375,000 and $40,000 on consumer demand studies and R&D
- Sales: 80,000 units, 70,000 units, 60,000 units.
- Retail price: $195, Variable Costs $125, and $1,400,000 in fixed costs
- 50% of Furbo purchases will result an additional $15 in revenue from Treat sales
- Machine to manufacture the product: $2,000,000, depreciated using 3yr MACRS schedule. Will be able to sell for $750,000 at the end of the 3
^{rd}year. - $1,000,000 will be set aside in inventory, and then adjust to 10% of Furbo sales (just the camera), and will be liquidated and recouped at the end of the project
- $1,000,000 in revenue will be lost each year from HappyPupâ€™s existing pet camera line.

Year |
MACRS |

1 |
33.33% |

2 |
44.45% |

3 |
14.81% |

4 |
7.41% |

- Calculate the Operating Cash flows for the project.
- Calculate the Cash Flow From Assets for this Project.
- What is the net present value of this project? Should the project be accepted or rejected?
- What is the IRR of this project (round to nearest number)?
- HappyPups does not have enough cash for the machine. HappyPups current has a debt-to-equity ratio of .7, and does not want to alter its capital structure. If HappyPups will be charged 8% to raise debt and 10% to raise equity, how much will the machine effectively cost HappyPups?
- Using the information in number 5, what is the new net present value of the project?

- One call option contract is worth 100 units of the underlying stock. The call option has an exercise price of $40, and option premium of $1. If you buy one call option contract, what is your net profit when the stock price is $20 at expiration? What is your net profit if the stock price is at $55 at expiration?

- One put option contract is worth 100 units of the underlying stock. The put option has an exercise price of $40, and option premium of $1. If you buy one put option contract, what is your net profit when the stock price is $20 at expiration? What is your net profit if the stock price is at $55 at expiration?