You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ),
ID: 2777387 • 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 $1.44 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. Refer to Table 10.7.
What is the NPV of the project? (Do not round intermediate calculations and round your final 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 $1.44 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:
Explanation / Answer
To calculate the net present value of the project, we need to calculate the cash flows of the project.
Initial cost
The initial cost is eqal to the expenditure on equipment and working capital.
Cf0=-3500000-129000
Initial cost = -$3629000
During the next four years ,the operating cash flow should be equal to
Operating cash flow=(sales-fixed cost-variable cost-Depreciation)*(1-t) +depreciation
Since we know the amount and price of zither sold each year and equipment is depreciated according to three-year MACRS schedule,
We are calculating the sales and depreciation
At the end of the 4th year ,there is also a cash inflow from the sales of equipment and the reduction in working capital. we have the non operating cash flow for the 4th year.
NOCf4= 420000*(1-40%)+129000
=$381000
year cash flow price sales cost of equipment property class depreciation OCF 1 4200 690 2898000 3500000 33.33% 1166550 2704770 2 5100 690 3519000 3500000 44.45% 1555750 3429310 3 5700 690 3933000 3500000 14.81% 518350 2615470 4 4600 690 3174000 3500000 7.41% 259350 1946610Related Questions
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