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 $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

Explanation / Answer

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

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