You have been hired as a consultant for Brunch Corporation, manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago for $1.4 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 $1.5 million on an after tax basis. In four years, the land could be sold for $1.6 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $125,000. 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 Brunch Corp. brings to bear, we feel that the company will be able to sell 3,200, 4,300, 3,900, and 2,800 units each year for the next four years, respectively. Again, capitalizing on the name recognition of Brunch Corp., we feel that a premium price of $780 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.

Brunch Corp. believes that fixed costs for the project will be $425,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $4.2 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $125,000 will be required immediately. Brunch Corp. has a 38 percent tax rate, and the required return on the project is 13 percent.

Required

1. Determine the initial outlay, yearly operating cash flow and the salvage value.
2. Calculate the net present value (NPV). Assume the company has other profitable projects, should the company accept or reject the project?