Question

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1,240,000 in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based on a recent appraisal, the company believes it could sell the land for $1,450,000 on an aftertax basis. In four years, the land could be sold for $1,475,000 after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $180,000. An excerpt of the marketing report is as follows:

The zither industry will have a rapid expansion in the next four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 7,220, 8,120, 9,365, and 6,210 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $350 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the 4-year period, sales should be discontinued.

PUTZ feels that fixed costs for the project will be $435,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $3,950,000 and will be depreciated according to a 3-year MACRS schedule. At the end of the project, the equipment can be scrapped for $420,000. Net working capital of $280,000 will be required immediately. PUTZ has a tax rate of 21 percent and the required return on the project is 14 percent. MACRS schedule.

What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Years	Three-Year	Five-Year	Seven-Year
1	33.33%	20.00%	14.29%
2	44.45	32.00	24.49
3	14.81	19.20	17.49
4	7.41	11.52	12.49
5		11.52	8.93
6		5.76	8.92
7			8.93
8			4.46

Answer 1

G H Sale E34 - X fx =3950000*0.3333 A B C D E F Contrib ution Fixed Depreciati 32 Year units per unit costs PBT 33 0 34 1 7,220 $ 280 435,000 1,316,535 270,065 35 2 8,120 $ 280 435,000 1,755,775 82,825 36 3 9,365 $ 280 435,000 584,995 1,602,205 46,210 $ 280 435,000 292,695 1,011,105 on Tax@21% PAT I J K L M N O Net Depreciati Operating working Total cash PVIF@ on cash flows capital Investment flows 14% Present value (280,000)| (5,400,000) (5,680,000)| 1.000 $ -5,680,000.00 1,316,535 1,529,886 1,529,886 0.877 $ 1,342,005.57 1,755,775 1,821,207 - 1,821,207 0.769 $ 1,401,359.46 584,995 | 1,850,737| - | 1,850,737 0.675 $ 1,249,194.73 292,695 1,091,468 280,000 1,806,800 3,178,268 0.592 $ 1,881,789.77 =1475000+420000*(1-21%) 56,714 213,351 17,393 65,432 336,463 | 1,265,742 212,332 798,773 Net present value $ 194,349.52 |

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