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 $1.43 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 $1.53 million on an aftertax basis. In four years, the land could be sold for $1.63 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $185,000. 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 3,940, 4,820, 5,440, and 4,330 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $635 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 $410,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.45 million and will qualify for 100 percent bonus depreciation. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $123,000 will be required immediately. PUTZ has a 23 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project?

Answer 1

		Year 0	Year 1	Year 2	Year 3	Year 4
A	Market Study Cost	185000
B	Units Sold		3940	4820	5440	4330
C	Total Sale Value (Multiplied by 635)		2501900	3060700	3454400	2749550
D	Fixed Cost (15% of Sale Value, multiplied by 0.15)		375285	459105	518160	412432.5
E	Equipment Cost		3450000
F	Depreciation		3450000
G	Scrap Value					400000
H	Net Working Capital		123000
I	EBIT (=C-D-H-A)	-185000	2003615	2601595	2936240	2337118
J	FCFF = EBIT(1-Tax rate)+F - E-H	-142450	1419784	2003228	2260905	1799580
K	Discount Power	0	1	2	3	4
L	Discount Factor = 1/(1+Required rate of return)^K	1.00	0.88	0.78	0.69	0.61
M	Present Value	-142450	1256446	1568821	1566920	1103716
N	NPV (Sum of all the present Value)	5353454

NPV of this project as shown in table $5,353,454