You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),

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 $1.42 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 $1.52 million on an aftertax basis. In four years, the land could be sold for $1.62 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $127,000. 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 4,000, 4,900, 5,500, and 4,400 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $670 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 $435,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $3.70 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $410,000. Net working capital of $127,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 12 percent. Refer to Table 10.7.

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

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 $1.42 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 $1.52 million on an aftertax basis. In four years, the land could be sold for $1.62 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $127,000. An excerpt of the marketing report is as follows:

Explanation / Answer

PV of cash flows = cash flow / (1+i)^n

i = 12%, n= number of period

Year                         -                                 1                           2                           3                           4 Sales revenue              2,680,000          3,283,000          3,685,000          2,948,000 Fixed cost                  435,000              435,000              435,000              435,000 Variable cost @ 20 % of sales                  536,000              656,600              737,000              589,600 Equipment cost        (3,700,000) Depreciation rate 33.33% 44.45% 14.81% 7.41% Depreciation            (1,233,210)        (1,644,650)           (547,970)           (274,170) Tax saving on depreciation                  493,284              657,860              219,188              109,668 Scrap value of equipment              410,000 Working capital           (127,000)              127,000 Total cash inflow/outflow        (3,827,000)              1,215,716          1,533,540          2,293,812          2,350,732 Pv of cash flows        (3,827,000)              1,085,461          1,222,529          1,632,690          1,493,933 NPV          1,607,612

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