You have been hired as a consultant for Pristine Urban-Tech Zither, Incorporated (PUTZ), manufacturers
of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago
for $2.9 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 $3.1 million on an after-tax basis. In four years, the land could be sold for $3.3 million after taxes.
The company also hired a marketing firm to analyze the zither market, at a cost of $375,000. 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 7,100, 7,800, 8,400, and 6,700
units each year for the next four years, respectively Again, capitalizing on the name recognition of PUTZ,
we feel that a premium price of $525 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 $755,000 per year, and variable costs are 15 percent
of sales. The equipment necessary for production will cost $3.65 million and will be depreciated according
to a three-year MACRS schedule. (MACRS Schedule) At the end of the project, the equipment can be
scrapped for $615,000. Net working capital of $325,000 will be required immediately. PUTZ has a tax rate
of 25 percent, and the required return on the project is 13 percent. What is the NPV of the project?
Note: Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars,
and round your answer to 2 decimal places, e.g., 1,234,567.89.
Property Class
Year Three-Year Five-Year Seven-Year
1 33.33% 20.00% 14.29%
2 44.45 32.00 24.49
3 14.81 19.20 17.49
4 7.41 11.52 12.49
5 11.52 8.93
6 5.76 8.92
7 8.93
8 4.46
