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 $1.9 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 $2.1 million on an aftertax basis. In four years, the land could be sold for $2.3 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $175,000. 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 5,100, 5,800, 6,400, and 4,700 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $425 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 $345,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $2.65 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $395,000. Net working capital of $125,000 will be required immediately. PUTZ has a tax rate of 22 percent, and the required return on the project is 13 percent. Refer to Table 10.7. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.)

Answer 1

Year	0	1	2	3	4
1.Opportunity cost of after-tax sale value of land lost	-2100000
2.After-sale value of land at end yr.4					2300000
3.Equipment cost	-2650000
4.NWC introduced & recovered	-125000				125000
5.After-tax salvage of equipment(395000*(1-22%))					308100
Operating cash flows:
6.Sales units		5100	5800	6400	4700
7.Selling price/unit		425	425	425	425
8.Sales $ (6*7)		2167500	2465000	2720000	1997500
9. Variable costs(8*15%)		-325125	-369750	-408000	-299625
10.Fixed costs		-345000	-345000	-345000	-345000
11.Depreciation(33.45%;44.45%;14.81%& 7.41%)		-883245	-1177925	-392465	-196365
12. EBT(8+9+10+11)		614130	572325	1574535	1156510
13. Tax at 22%(12*22%)		-135109	-125912	-346398	-254432
14. EAT(12+13)		479021.4	446413.5	1228137	902077.8
15.Add back:depn.(Row 11)		883245	1177925	392465	196365
16.Operating cash flows(14+15)		1362266	1624339	1620602	1098443
17.Annual FCFs(1+2+3+4+5+16)	-4875000	1362266	1624339	1620602	3831543
18.PV F at 13%(1/1.13^Yr.n)	1	0.88496	0.78315	0.69305	0.61332
19.PV at 13%(17*18)	-4875000	1205545	1272095	1123159	2349957
20.NPV at 13%(sum of row 19)	1075756.44

Answer 2

1075756.44

is the correct answer