Question
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. An excerpt from the companys marketing report is
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. An excerpt from the companys 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 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 will be 10 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule: Year 3 year MACRS 1 33.33% 2 44.45% 3 14.81% 4 7.41% At the end of the project, the equipment can be scrapped for $350,000. Net working capital of $125,000 will be required immediately. Additional net working capital investments will be required each year. These additional investments will be 10% of the projected sales increase for the following year. PUTZ has a 38 percent corporate as well as capital gains tax rate, and the required return on the project is 13 percent. 1. What is the NPV of the project? 2. What is the IRR of the project?
Answer Format: The spreadsheet for provides an input area, where you can enter all relevant information provided for project evaluation, and an output area, where you construct net cash flows for each year and compute NPV/IRR of the project.
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