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 $1.4 million in anticipation of using it as a toxic waste dump site but recently has hired another company to handle all toxic materials. Based on recent appraisal, the company believes it could sell the land for $1.5 million on an after tax basis. The company will be using the land for Zither related production. In four years, the land could be sold for $1.6 million after taxes. The company also hired a marketing firm to analyse 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 PUTZ brings to bear, we feel that the company will be able to sell 3200, 4300, 3900 and 2800 units each year for the next four years, respectively, Again, capitalizing on the name recognition of PUTZ, 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. PUTZ believes that fixed costs for the project will be $425,000 per year, and variable costs are 15% of sales. The equipment necessary for production will costs $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. PUTZ has a 38 percent tax rate, and the required return on project is 13 percent. What is the NPV of the project? Assume the company has other profitable projects. AAI Inc., project unit sales for a new seven-octave voice emulation implant as for the following follows: Year Unit Sales1 93,0002 105,0003 128,0004 134,0005 87,000Production of the implants will require $1,800,000 in net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,200,000 per year, variable production costs are $265 per unit and the units are priced at $380 each. The equipment needed to begin production has an installed cost of $24,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. In five years, this equipment can be sold for about 20 percent of its acquisition cost. AAI is in the 35 percent marginal tax bracket and has a required return on all its projects of 18 percent. Based on this preliminary project estimates, what is the NPV of the project? What is the IRR?

PUTZ AND AAI CASH FLOW ESTIMATION # 0 File Edit View Insert Format Data Tools Add-on Help . Lastedit was 6 minutes ago D Year O Year 1 Year 2 Year 3 Year 4 Equipment Cost 4200000 Coast 420 00 00 Salvage Value 400800 NWC 125000 Land 1500000 Year Sales MACHI Sales revenue($) 780 2496000 335 4000 1042000 2184000 1 3200 0.3333 1399860 Variable Cost 0.15 374400 503100 456300 327600 43:00 2 0,4445 1866900 Fixed Colts 425000 425000 425000 425000 2900 3 0.1481 622020 13 Depreciation 1399860 1856900 622020 311220 2800 4 0.0741 311220 295740 559000 1538680 1120180 1 4200000 14. Taxes 0.34 112761 2 212420 584695,4 425668.4 CAT 183978.8 346580 953981.6 694511 6 Tax gain/loss= tax rate (BV-MV] Add depreciation 1399860 1866200 622020 311220 VC 0.15 -152050 Operating Cash Flow 1005731.6 FC 425,000 Land 1600000 NWC 125000 IN - Cut - accumusled depreciation NWC 125000 Equipment 400000 BVSMY Tix Bain 31 Tax gain/Loss 152000 + ! BASE CASE - AAl - Sheeti