You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2384520 • 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 $1.46 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 $1.56 million on an aftertax basis. In four years, the land could be sold for $1.66 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $131,000. 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 4,400, 5,300, 5,900, and 4,800 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $710 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 $455,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $4.1 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $430,000. Net working capital of $131,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 13 percent. MACRS Schedule
What is the NPV of the project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your 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 $1.46 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 $1.56 million on an aftertax basis. In four years, the land could be sold for $1.66 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $131,000. An excerpt of the marketing report is as follows:
Explanation / Answer
What is the NPV of the project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV = $ 1,410,678.49
Working
Post tax Salvage Value = 430000*(1-40%) = 258000
Note : Cost of marketing firm is Sunk cost and It is not taken in consideration
Year0 Year 1 Year2 Year3 Year4 Unit Sold [a] 4,400 5,300 5,900 4,800 Unit Price [b] 710 710 710 710 Sales [ c = a*b] 3,124,000 3,763,000 4,189,000 3,408,000 Variable Cost [ d = 15%*c] 468,600 564,450 628,350 511,200 Fixed Cost [e] 455,000 455,000 455,000 455,000 Depreciation [f] 1,366,530 1,822,450 607,210 303,810 Net Operating Income before tax [g = c-d-e-f] 833,870 921,100 2,498,440 2,137,990 Tax Expenses [h = g*40%] 333,548 368,440 999,376 855,196 Annual Operating cash flow [i= g+f - h] 1,866,852 2,375,110 2,106,274 1,586,604 Land [j] -1560000 1,660,000 Equipment Cost [k] -4100000 Net Working Capital used & realised [l] -131000 131,000 Post Tax Salvage Value [m] 258,000 Cash flow [n] -5791000 1,866,852 2,375,110 2,106,274 3,635,604 PV Factor @ 13% [o] 1 0.884955752 0.783146683 0.693050162 0.613318728 Present Value [p = n*o] -5791000 1,652,081.42 1,860,059.52 1,459,753.54 2,229,784.02 NPV 1,410,678.49Related Questions
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