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Homework answers / question archive / You have been hired as a consultant for Pristine Urban-Tech Zither, Inc

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc

Finance

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 $2.35 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 $2.55 million on an aftertax basis. In four years, the land could be sold for $2.75 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $265,000. 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 6,000, 6700, 7,300, and 5,600 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $470 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 $535,000 per year, and variable costs are 25 percent of sales. The equipment necessary for production will cost $3.1 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $505,000. Net working capital of $215,000 will be required immediately. PUTZ has a tax rate of 24 percent, and the required return on the project is 10 percent. MACRS Schedule What is the NPV of the project? (Do not round Intermediate calculations. Enter your answer in dollars, not millions of dollars, and round your answer to 2 decimal places, c.g. 1,234,567.89.) NPV

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  • Calculation of NPV of the Project          
    Particulars 0 1 2 3 4
    Initial Investment          
    Value of land -2550000        
    Cost of Equipment -3100000        
    Investment in working capital -215000        
    Net Investment (A) -5865000        
    Operating Cash Flows          
    Sales Units (B)   6000 6700 7300 5600
    Annual Sales (C = B*$470)   2820000 3149000 3431000 2632000
    Variable Costs (D = C*25%)   705000 787250 857750 658000
    Fixed Costs (E )   535000 535000 535000 535000
    Depreciation (F)
    ($3,100,000 * 33.33%, 44.45%, 14.81%,7.41%)
      1033230 1377950 459110 229710
    Profit Before Tax (G = C-D-E-F)   546770 448800 1579140 1209290
    Tax @24% (H = G*24%)   131224.8 107712 378993.6 290229.6
    Profit After Tax (I = G-H)   415545.2 341088 1200146.4 919060.4
    Add back Depreciation (J = F)   1033230 1377950 459110 229710
    Net Operating Cash Flows (K = I+J)   1448775.2 1719038 1659256.4 1148770.4
    Terminal Value          
    After Tax Sale value of Land (L)         2750000
    Sale Value of Equipment (M)         505000
    Tax @24% (N = M*24%)         121200
    After Tax Sale Value of Equipment (O = M-N)         383800
    Recovery of Net Working Capital (P)         215000
    Net Terminal Value (Q = L+O+P)         3348800
    Total Cash Flows (R = A+K+Q) -5865000 1448775.2 1719038 1659256.4 4497570.4
    Discount Factor @10% (S)
    1/(1+10%)^n n=0,1,2,3,4
    1 0.909090909 0.826446281 0.751314801 0.683013455
    Discounted Cash Flows (T = R*S) -5865000 1317068.364 1420692.562 1246623.892 3071901.1
    Net Present Value 1191285.917        
    Therefore, NPV of the Project is $1,191,285.92