You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2724353 • Letter: Y
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 $1.33 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 $1.43 million on an aftertax basis. In four years, the land could be sold for $1.53 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $118,000. 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 3,100, 4,000, 4,600, and 3,500 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $580 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 $390,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $2.8 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $365,000. Net working capital of $118,000 will be required immediately. PUTZ has a 35 percent tax rate, and the required return on the project is 12 percent. MACRS Schedule
What is the NPV of the project?
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 $1.33 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 $1.43 million on an aftertax basis. In four years, the land could be sold for $1.53 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $118,000. An excerpt of the marketing report is as follows:
Explanation / Answer
The NPV of the project is calculated as follows:
Note: We have not taken into consideration the land cost and land price 4 years from now since the request is to calculate the project cost only. Secondly marketing expense of 118,000 is not considered since it is a sunk cost and should not be used in the NPV analysis
Year 0 1 2 3 4 Initial Investment -2800000 Net Working Capital -118000 Reveneues 1798000 2320000 2668000 2030000 Variable Cost 359600 464000 533600 406000 Fixed Costs 390000 390000 390000 390000 Depreciation as per MACRS 924000 1260000 420000 196000 Profit before tax 124400 206000 1324400 1038000 Tax at 35% 43540 72100 463540 363300 Profit after tax 80860 133900 860860 674700 Add back depreciation 924000 1260000 420000 196000 Return of Working Capital 118000 After tax salavage value 219000 Net Cash flow -2918000 1004860 1393900 1280860 1207700 NPV at 12% $ 769,611.01Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.