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 $1.48 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 $1,580,000 on an aftertax basis. In four years, the land could be sold for $1,680,000 after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $133,000. 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 4,600, 5,500, 6,100, and 5,000 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $730 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 feels that fixed costs for the project will be $465,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $4.30 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $440,000. Net working capital of $133,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 12 percent. Assume the company has other profitable projects. MACRS schedule. 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

Tax rate		40%
	Year-0	Year-1	Year-2	Year-3	Year-4
Units		4,600	5,500	6,100	5,000
Sale Price		730	730	730	730
variable cost-20%		146	146	146	146
Sale		3,358,000	4,015,000	4,453,000	3,650,000
Less: Operating Cost		671,600	803,000	890,600	730,000
Contribution		2,686,400	3,212,000	3,562,400	2,920,000
Less: Fixed Cost		465,000	465,000	465,000	465,000
Less: Depreciation as per table given below		1,433,190	1,911,350	636,830	318,630
Profit before tax		788,210	835,650	2,460,570	2,136,370
Tax		315,284	334,260	984,228	854,548
Profit After Tax		472,926	501,390	1,476,342	1,281,822
Add Depreciation		1,433,190	1,911,350	636,830	318,630
Cash Profit After tax		1,906,116	2,412,740	2,113,172	1,600,452
Cost of macine			4,300,000
Depreciation			4,300,000
WDV			-
Sale price			440,000
Profit/(Loss)			440,000
Tax			176,000
Sale price after tax			264,000
Depreciation		Year-1	Year-2	Year-3	Year-4		Total
Cost		4,300,000	4,300,000	4,300,000	4,300,000
Dep Rate		33.33%	44.45%	14.81%	7.41%
Deprecaition		1,433,190	1,911,350	636,830	318,630		4,300,000
Calculation of NPV
						12.00%
Year	Land	Captial	Working captial	Operating cash	Annual Cash flow	PV factor	Present values
0	(1,580,000)	(4,300,000)	(133,000)		(6,013,000)	1.000	(6,013,000.00)
1			-	1,906,116	1,906,116	0.893	1,701,889.29
2			-	2,412,740	2,412,740	0.797	1,923,421.56
3			-	2,113,172	2,113,172	0.712	1,504,114.09
4	1,680,000	264,000	133,000	1,600,452	3,677,452	0.636	2,337,087.23
					Net Present Value		1,453,512.16