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 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we \feel that a premium price of $750 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 $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately (this will be recovered at the end of the project (Year 4). Interest expense on debt raised to fund the project is estimated to be $100,000 per year. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. C. a. Prepare a proforma statement showing the annual cash flows resulting from the project and calculate the Net Present Value (NPV) of the project. (20 pts) b. Suppose you believe that the marketing department's price projection is accurate only to within +10 percent. Please calculate worst and best cases scenario NPV values? How should the annual interest expenses of $100,000 be treated? Explain. (3 pts) d. Calculate the IRR of the project. Based on your calculations what do you recommend? Why? (2 pts) How sensitive is the net present value of the project to the cost of capital? Show it with a table and a graph. (5 pts) f. Use the base case estimates calculate the cash and accounting break-even of the project. Interpret each one. (5 pts) e. 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 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we \feel that a premium price of $750 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 $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately (this will be recovered at the end of the project (Year 4). Interest expense on debt raised to fund the project is estimated to be $100,000 per year. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. C. a. Prepare a proforma statement showing the annual cash flows resulting from the project and calculate the Net Present Value (NPV) of the project. (20 pts) b. Suppose you believe that the marketing department's price projection is accurate only to within +10 percent. Please calculate worst and best cases scenario NPV values? How should the annual interest expenses of $100,000 be treated? Explain. (3 pts) d. Calculate the IRR of the project. Based on your calculations what do you recommend? Why? (2 pts) How sensitive is the net present value of the project to the cost of capital? Show it with a table and a graph. (5 pts) f. Use the base case estimates calculate the cash and accounting break-even of the project. Interpret each one. (5 pts) e
