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 $1.44 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 $1.54 million on an aftertax basis. In four years, the land could be sold for $1.64 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $129,000. 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 4,200, 5,100, 5,700, and 4,600 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $690 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 $445,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $3.90 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $420,000. Net working capital of $129,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 14 percent. what is the NPV?

Explanation / Answer

Hi

Please use below for the calculation. Some issue in final answer, got below comments why the answer was wrong.

Hope this might help you.

Comments:

Did you discount the value of the project? NPV is all about discounted rate of return based on the time value of the cash flows. I didn't see anything to show the discount rate.

Calculation:

Year 1 2 3 4
Sales 3240000 3888000 4320000 3528000
Var Cost (10% of sales) 324000 388800 432000 352800
Fixed Cost 460000 460000 460000 460000
Dep. 1399860 1866900 622020 311220

EBIT 1056140 1172300 2805980 2403980
Taxes (40%) 422456 468920 1122392 961592

Net Income 633684 703380 1683588 1442388

OCF 2033544 2570280 2305608 1753608

OCF 2033544 2570280 2305608 1753608
Change NWC -132,000 132000
Cap. Spend -4200000 261000

Total cash flow -4332000 2033544 2570280 2305608 2146608

NPV $2,256,741.51 (This is the NPV I got, but it is marked wrong).

Regards

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