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 $1.4 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 $1.5 million on an aftertax basis. In four years, the land could be sold for $1.6 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. 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 3,800, 4,700, 5,300, and 4,200 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $650 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 $425,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $125,000 will be required immediately. PUTZ has a 38 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 final answer to 2 decimal places. (e.g., 32.16))

Answer 1

Statement showing depreciation

Year	Opening balance	Deprecition rates	Deprecition	Closing balance
1	3500000	33.33%	1166550	2333450
2	2333450	44.45%	1555750	777700
3	777700	14.81%	518350	259350
4	259350	7.41%	259350	0

Statement showing NPV

Particulars	0	1	2	3	4	NPV
Purchase of equipment	-3500000
WC required	-125000
Opportunity loss on sale of land	-1500000
Sales unit		3800	4700	5300	4200
SPPU		650	650	650	650
Total sales		2470000	3055000	3445000	2730000
Less VC(15% of sales)		370500	458250	516750	409500
FC		425000	425000	425000	425000
Depreictaion		1166550	1555750	518350	259350
PBT		507950	616000	1984900	1636150
Tax @ 38%		193021	234080	754262	621737
PAT		314929	381920	1230638	1014413
Add: depreciation		1166550	1555750	518350	259350
Cash flow		1481479	1937670	1748988	1273763
Salvage value(400000-38%)					288000
WC released					125000
Sale of land					1600000
Total cash flow	-5125000	1481479	1937670	1748988	3286763
PVIF @ 13%	1	0.8850	0.7831	0.6931	0.6133
Present value	-5125000	1311043	1517480	1212136	2015833	931493