Exercise

Suppose you are employed as a consultant at Pristine Urban-Tech Zither Inc. (PUTZ) The company bought land three years ago for $ 1.4 million to use as toxic waste treatment space, but recently the company hired another company to treat toxic waste. Based on recent estimates the company believes it can sell the land for $ 1.5 million after taxes. After 4 years the land can be sold for $ 1.6 million after taxes. The company has also hired a market research firm for a cost of $ 125,000 for the next 4 years. The marketing report is as follows: PUTZ will have a rapid expansion in the next 4 years. The company will be able to sell 3200, 4300, 3900, 2800 units every year. The price for each unit will be $ 780. PUTZ for its part believes that the fixed costs of the project will be $ 425,000 per year and the variable costs will be 15% of sales. Equipment needed for production will cost $ 4.2 million and will be depreciated under the 3-year MACRS. At the end of the project the equipment can be sold for $ 400,000. The investment in net working capital will be $ 125,000. The tax rate is 38% and the required project return is 13%. Find the NPV of the project?