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In: Finance

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine...

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.)

Solutions

Expert Solution

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

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