You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2810019 • 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 $1.48 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 $1,580,000 on an aftertax basis. In four years, the land could be sold for $1,680,000 after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $133,000. 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 4,600, 5,500, 6,100, and 5,000 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $730 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 feels that fixed costs for the project will be $465,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $4.30 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $440,000. Net working capital of $133,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 12 percent. Assume the company has other profitable projects. 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.)
Explanation / Answer
Tax rate 40% Year-0 Year-1 Year-2 Year-3 Year-4 Units 4,600 5,500 6,100 5,000 Sale Price 730 730 730 730 variable cost-20% 146 146 146 146 Sale 3,358,000 4,015,000 4,453,000 3,650,000 Less: Operating Cost 671,600 803,000 890,600 730,000 Contribution 2,686,400 3,212,000 3,562,400 2,920,000 Less: Fixed Cost 465,000 465,000 465,000 465,000 Less: Depreciation as per table given below 1,433,190 1,911,350 636,830 318,630 Profit before tax 788,210 835,650 2,460,570 2,136,370 Tax 315,284 334,260 984,228 854,548 Profit After Tax 472,926 501,390 1,476,342 1,281,822 Add Depreciation 1,433,190 1,911,350 636,830 318,630 Cash Profit After tax 1,906,116 2,412,740 2,113,172 1,600,452 Cost of macine 4,300,000 Depreciation 4,300,000 WDV - Sale price 440,000 Profit/(Loss) 440,000 Tax 176,000 Sale price after tax 264,000 Depreciation Year-1 Year-2 Year-3 Year-4 Total Cost 4,300,000 4,300,000 4,300,000 4,300,000 Dep Rate 33.33% 44.45% 14.81% 7.41% Deprecaition 1,433,190 1,911,350 636,830 318,630 4,300,000 Calculation of NPV 12.00% Year Land Captial Working captial Operating cash Annual Cash flow PV factor Present values 0 (1,580,000) (4,300,000) (133,000) (6,013,000) 1.000 (6,013,000.00) 1 - 1,906,116 1,906,116 0.893 1,701,889.29 2 - 2,412,740 2,412,740 0.797 1,923,421.56 3 - 2,113,172 2,113,172 0.712 1,504,114.09 4 1,680,000 264,000 133,000 1,600,452 3,677,452 0.636 2,337,087.23 Net Present Value 1,453,512.16
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