Pristine Musical FCF Estimation You have been hired as a financial consultant for Pristine Musical, Incorporated (PM), a manufacturer of musical instruments. The market for zithers is growing quickly and therefore the company plans to launch a new product line manufacturing zithers. The company 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 PM 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 PM, 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. PM 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 $1.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be resold for a market price of $400,000 after accounting for inflation. Net working capital of $150,000 will be required immediately. 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. So the land will be reallocated for the zither project. Based on a recent appraisal, the company believes it could sell the land for $2.2 million on an after-tax basis. In four years, the land could be sold for $2.4 million after accounting for inflation. PM also manufactures strings instruments (such as violin, cello, etc.). Revenue from strings instruments is constant at $1 million per year, and COGS is 40% of revenue. Depreciation of equipment used for strings production will be $10,000 per year in the next four years. The marketing report suggests that the production of zithers will reduce sales revenue from strings instruments by 5%. An annual inflation rate of 2% is expected throughout the forecast period. PM plans to adjust its pricing for the strings instruments every year to account for inflation. However, since zither is new to the market and PM feels that customers price sensitivity for the new product will be very high, PM plans to keep zither pricing constant throughout the project horizon. PMs suppliers will adjust their pricing for inflation annually. PM has an income tax rate of 23% and a capital gains tax rate of 15%. The nominal required return on the project is 13%. What is the NPV of the project?

\begin{tabular}{|r|r|r|r|r|r|} \hline Assumptions \\ \hline Variable cost margin & 20% \\ \hline Fixed cost per year & $375,000 & \\ \hline Equipment cost & $1,500,000 & \\ \hline Equipment resale value & $400,000 & \\ \hline NWC & $150,000 & \\ \hline Land & ? & \\ \hline Income tax rate & 23% & \\ \hline Capital gains tax rate & 15% & \\ \hline Nominal discount rate & 13% & & \\ \hline Inflation rate & 2% & & \\ \hline & & & \\ \hline \end{tabular}