Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. 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. Based on a recent appraisal, the company believes it could sell the land for $2.1 million on an aftertax basis. In four years, the land could be sold for $2.3 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $175,000. 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 PUTZ brings to bear, we feel that the company will be able to sell 5,100, 5,800, 6,400, and 4,700 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $425 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 $345,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $2.65 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $395,000. Net working capital of $125,000 will be required immediately. PUTZ has a tax rate of 22 percent, and the required return on the project is 13 percent. Refer to Table 10.7.
What is the NPV of the project?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Students also viewed these Finance questions

Question

How to get organized for purchasing in multi-unit companies.

Answered: 1 week ago