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 $1.45 million 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 $1.55 million on an aftertax basis. In four years, the land could be sold for $1.65 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $195,000. 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 3,980, 4,840, 5,480, and 4,350 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $645 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ believes that fixed costs for the project will be $420,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $3.55 million and will qualify for 100 percent bonus depreciation. At the end of the project, the equipment can be scrapped for $410,000. Net working capital of $129,000 will be required immediately. PUTZ has a 21 percent tax rate, and the required return on the project is 12 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $ 2218528

Answer 1

L11 for D --3550000*(1-21%)-1550000 E F G H x A B C Contribu Sale tion per Fixed 10 Year units costs 110 12 1 3,980 $ 581 420,000 13 214,840 $ 581 420,000 14 3 5,480 $ 581 420,000 15 4 4,350 $ 581 420,000 Depreci ation PBT unit Tax@21% PAT I J K L M N O Net Deprec Operating working Total cash PVIF@ iation cash flows capital Investment flows 12% Present value (129,000) (4,354,500)| (4,483,500) 1.000 $ (4,483,500.00) - 1,493,408 | 1,493,408 0.893 $ 1,333,400.09 1,887,800 1,887,800 0.797 $ 1,504,942.44 - 2,181,301 2,181,301 0.712 $ 1,552,606.68 1,663,088 129,000 1,973,900 3,765,988 0.636 $ 2,393,353.62 - 1,890,390 2,389,620 2,761,140 2,105,175 396,982 501,820 579,839 442,087 1,493,408 1,887,800 2,181,301 1,663,088 - 16 17 Net present value $ 2,300,802.83

*Please rate thumbs up