5 2 points You have been hired as a consultant for Pristine Urban-Tech Zither, Incorporated (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.9 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 $2.2 million on an aftertax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $275,000. 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 5,200, 5,900, 6,500, and 4,800 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $435 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 $375,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $2.85 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $405,000. Net working capital of $150,000 will be required immediately. PUTZ has a tax rate of 22 percent and the required return on the project is 13 percent. MACRS schedule. What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.. 1,234,567.89.) NPV Answer is complete but not entirely correct. $ 624,063 16 S 02:06:44 eBook Hint References You have been hired as a consultant for Pristine Urban-Tech Zither, Incorporated (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.9 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 $2.2 million on an aftertax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $275,000. 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 5,200 5,900, 6,500, and 4,800 units each year for the next four years. respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $435 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 $375,000 per year, and variable costs are 20 percent of sales. The equipment necessary for production will cost $2.85 million and will be depreciated according to a three-year MACRS schedule. At the end of the project the equipment can be scrapped for $405,000. Net working capital of $150,000 will be required immediately, PUTZ has a tax rate of 22 percent and the required return on the project is 13 percent. MACRS schedule What is the NPV of the project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.. 1,234,567.89.) (NPV $ 624,063 16 Table 6.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS) Recovery Period Class Year 3 Years 5 Years 7 Years 10 Years 15 Years 20 Years 1 3333 2000 1429 1000 0500 .03750 2 4445 3200 2449 1800 .0950 07219 3 1481 .1920 1749 .1440 .0855 .06677 4 0741 1152 1249 1152 .0770 06177 5 1152 .0893 .0922 .0693 05713 6 0576 .0892 0737 .0623 .05285 7 .0893 0655 0590 04888 8 .0446 0655 0590 04522 9 .0656 .0591 .04462 10 0655 0590 .04461 11 12 13 14 15 16 17 18 19 20 21 0328 0591 .04462 .0590 .04461 0591 04462 0590 04461 0591 .04462 0295 04461 04462 04461 04462 04461 02231 Depreciation is expressed as a percentage of the asset's initial cost. These schedules are based on IRS Pub purchase is made midyear.