You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2651923 • 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 $1.37 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 $1.47 million on an aftertax basis. In four years, the land could be sold for $1.57 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $122,000. 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 3,500, 4,400, 5,000, 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 $620 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 $410,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $3.20 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $385,000. Net working capital of $122,000 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 of the project?
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 $1.37 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 $1.47 million on an aftertax basis. In four years, the land could be sold for $1.57 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $122,000. An excerpt of the marketing report is as follows:
Explanation / Answer
Answer:-
Investment = 3200000
Net working capital = 122000
Year = 4 years
Scrap = 385000
Tax Rate = 40%
Required rate of return = 14%
Fixed Cost = 410000 per annuam
Variable Cost = 10% of Sales
Depreciation According 3 years property class
Present Value = 1186076 + 1236963 + 1011290 + 872990
= 4307319
Net Present Value (NPV) = Present Value - Investment - Net working Capital Investment
= 4307319 - 3200000 - 122000
= 985319
Year 1 2 3 4 Quantity 3500 4400 5000 3900 Selling Price 620 620 620 620 Total Sales =3500*620 = 2170000 2728000 3100000 2418000 Less:- Variable Cost(10% of sales) =(2170000*10%) = (217000) (272800) (310000) (241800) Contribution 1953000 2455200 2790000 2176200 Less:- Fixed Cost (410000) (410000) (410000) (410000) Less:- Depreciation =(3200000*33.33%) = (1066560) =(3200000-1066560)*44.45% = (948314) =(3200000-1066560-948314)*14.81% = (175517) =(3200000-1066560-948314-175517)*7.41% = (74812) Profit before tax 476440 1096886 2204483 1691388 Less:- Tax 40% =(476440*40%) = (190576) (438754) (881793) (676555) Profit After Tax 285864 658132 1322690 1014833 Add:- Depreciation 1066560 948314 175517 74812 Add:- Scrap 385000 Cash Inflow 1352424 1606446 1498207 1474645 PVIF at 14% .877 .77 .675 .592 Present Value 1186076 1236963 1011290 872990
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