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 $2.1 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 $2.3 million on an aftertax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. 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 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 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 $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately. PUTZ has a 38 percent tax rate, and the required return on the project is 13 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.)

Attach below is the sample with different data.

Answer: Analysis cost of $123,000 is not relevant for NPV calculation as it has to be incurred even if the proiect is not undertaken Sl Particulars Year 0 Year Year 2 Year 3 Y ear 4 5100 4000 A Units sold B Selling price c 3600 4500 630 630 630 630 Total Sales(A x B) Variable Costs (15% oro Contribution (C D) 2,268,0002,835,000 3,213,000 2,520,000 378,000 2,731,050 2,142,000 415,000 1,389,6301,036,200 D 340,200 425,250 481,950 1,927,800 2,409,750 F Fixed Costs 415,000 415,000 415,000 Contribution Post tax (E F)x 907,6801,196,850

Answer 1

Particulars	Year0	Year1	Year2	Year3	Year4
Unit Sold	0	3600	4300	5200	3900
Selling Price		750	750	750	750
Total sales	0	2700000	3225000	3900000	2925000
Variable cost	0	405000	483750	585000	438750
Contribution	0	2295000	2741250	3315000	2486250
Fixed Cost		415000	415000	415000	415000
		1880000	2326250	2900000	2071250
Post tax		1165600	1442275	1798000	1284175
Depreciation tax saving		443289	591185	196973	98553
Gross cash flow		1608889	2033460	1994973	1382728
investment In equipment	-35,00,000
Net working capital	-125000
Net cash flow	-36,25,000	1608889	2033460	1994973	1382728
pv factor @ 13%	1	0.884955752	0.783146683	0.693050162	0.613318728
Present value	-3625000	1423795.57	1592497.45	1382616.36	848052.978
NPV (sum year 0 to 4)	1621962.368
Rates	Value	Depreciation	Tax rate	Deoreciation tax saving
33.33	35,00,000	1166550	38%	443289
44.45	35,00,000	1555750	38%	591185
14.81	35,00,000	518350	38%	196973
7.41	35,00,000	259350	38%	98553