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 $1.43 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 $1.53 million on an aftertax basis. In four years, the land could be sold for $1.63 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $185,000. 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 3,940, 4,820, 5,440, and 4,330 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $635 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 15 percent of sales. The equipment necessary for production will cost $3.45 million and will qualify for 100 percent bonus depreciation. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $123,000 will be required immediately. PUTZ has a 23 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV $

Answer 1

Tax rate		23%
Calculation of annual depreciation
Depreciation		Year-1	Year-2	Year-3	Year-4	Year-5	Total
Cost		$       3,450,000	$      3,450,000	$      3,450,000	$       3,450,000	$   3,450,000
Dep Rate		100.00%	0.00%	0.00%	0.00%	0.00%
Depreciation		$       3,450,000	$                   -	$                   -	$                    -	$                -	$       3,450,000
Calculation of after-tax salvage value
Cost of machine			$      3,450,000
Depreciation			$      3,450,000
WDV			$                   -
Sale price			$         400,000
Profit/(Loss)			$         400,000
Tax			$           92,000
Sale price after-tax			$         308,000
Calculation of annual operating cash flow
		Year-1	Year-2	Year-3	Year-4
No of units		3,920.00	4,820.00	5,440.00	4,330.00
Selling price		$            635.00	$           635.00	$           635.00	$            635.00
Operating ost-15% of 635		$              95.25	$             95.25	$             95.25	$              95.25
Sale		$       2,489,200	$      3,060,700	$      3,454,400	$       2,749,550
Less: Operating Cost		$          373,380	$         459,105	$         518,160	$          412,433
Contribution		$       2,115,820	$      2,601,595	$      2,936,240	$       2,337,118
Less: Fixed cost		$          410,000	$         410,000	$         410,000	$          410,000
Less: Depreciation		$       3,450,000	$                   -	$                   -	$                    -
Profit before tax		$      (1,744,180)	$      2,191,595	$      2,526,240	$       1,927,118
Tax@23%		$         (401,161)	$         504,067	$         581,035	$          443,237
Profit After Tax		$      (1,343,019)	$      1,687,528	$      1,945,205	$       1,483,880
Add Depreciation		$       3,450,000	$                   -	$                   -	$                    -
Cash Profit after-tax		$       2,106,981	$      1,687,528	$      1,945,205	$       1,483,880
Calculation of NPV
						13.00%
Year		Capital	Working capital	Operating cash	Annual Cash flow	PV factor	Present values
0		$ (3,450,000.00)	$ (123,000.00)		$(3,573,000.00)	1.0000	$(3,573,000.00)
1			$                   -	$ 2,106,981.40	$ 2,106,981.40	0.8850	$ 1,864,585.31
2			$                   -	$ 1,687,528.15	$ 1,687,528.15	0.7831	$ 1,321,582.07
3			$                   -	$ 1,945,204.80	$ 1,945,204.80	0.6931	$ 1,348,124.50
4		$     308,000.00	$    123,000.00	$ 1,483,880.48	$ 1,914,880.48	0.6133	$ 1,174,432.06
					Net Present Value		$ 2,135,723.94