You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2723477 • 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 $1.49 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 $1.59 million on an aftertax basis. In four years, the land could be sold for $1.69 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $134,000. 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 4,700, 5,600, 6,200, and 5,100 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $740 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 $470,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $4.4 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $445,000. Net working capital of $134,000 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 $1.49 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 $1.59 million on an aftertax basis. In four years, the land could be sold for $1.69 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $134,000. An excerpt of the marketing report is as follows:
Explanation / Answer
SALVAGE VALUE => 445000-40% => $267000
NPV =>$1737420
PARTICULARS YEAR 0 YEAR 1 YEAR 2 YEAR 3 YEAR 4 SALES 3478000 4144000 4588000 3774000 lESS VARIABLE COST 521700 621600 688200 566100 FIXED COST 470000 470000 470000 470000 DEPRECIATION 1466520 1955800 651640 326040 INCOME 1019780 1096600 2778160 2411860 TAXES (40%) 407912 438640 1111264 964744 NET INCOME 611868 657960 1666896 1447116 CASH FLOWS 2078388 2613760 2318536 1773156 CAPITAL SPENDING -4400000 267000 WORKING CAPITAL -134000 134000 LAND -1590000 1690000 OCF -6124000 2078388 2613760 2318536 3864156 DISCOUNTING FACTOR 1 0.885 0.783 0.693 0.613 PRESENT VALUE -6124000 1839373 2046574 1606745 2368728Related Questions
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