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 $1.35 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 $1.450.000 on an aftertax basis. At the end of the project, the land could be sold for $1,550,000 on an aftertax basis. The company also hired a marketing firm to analyze the zither market, at a cost of $120,000. 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 3,300, 4,200, 4,800, and 3,700 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $600 can be charged for each zither. Since zithers appear to be a fad, we feel at the end of the four-year period, sales should be discontinued. PUTZ feels that fixed costs for the project will be $400,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $375,000. Net working capital of $120,000 will be required immediately and will be recaptured at the end of the project. PUTZ has a 38 percent tax rate and the required return on the project is 13 percent. Refer to Table 8.3. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Time line		0	1	2	3	4
Land cost		-1450000
Cost of new machine		-3000000
Initial working capital		-120000
=Initial Investment outlay		-4570000
3 years MACR rate			33.33%	44.45%	14.81%	7.41%
Unit sales			3300	4200	4800	3700
Profits	=no. of units sold * (sales price - variable cost)		1683000	2142000	2448000	1887000
Fixed cost			-400000	-400000	-400000	-400000
-Depreciation	=Cost of machine*MACR%		-999900	-1333500	-444300	-222300
=Pretax cash flows			283100	408500	1603700	1264700
-taxes	=(Pretax cash flows)*(1-tax)		175522	253270	994294	784114
+Depreciation			999900	1333500	444300	222300
=after tax operating cash flow			1175422	1586770	1438594	1006414
reversal of working capital						120000
'+Proceeds from sale of land and equipment after tax	'=selling price* ( 1 -tax rate)					1550000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)					232500
+Tax shield on salvage book value	=Salvage value * tax rate					0
=Terminal year after tax cash flows						1902500
Total Cash flow for the period		-4570000	1175422	1586770	1438594	2908914
Discount factor=	(1+discount rate)^corresponding period	1	1.13	1.2769	1.442897	1.6304736
Discounted CF=	Cashflow/discount factor	-4570000	1040196.46	1242673.7	997017.81	1784091.4
NPV=	Sum of discounted CF=	493979.37