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 $2.55 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 $2.75 million on an aftertax basis. In four years, the land could be sold for $2.95 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $305,000. An excerpt of the marketing report is as follows:
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 $2.55 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 $2.75 million on an aftertax basis. In four years, the land could be sold for $2.95 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $305,000. An excerpt of the marketing report is as follows:
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:Year
1
2
23
4
5678
Property Class
Three-Year
33.33%
44.45
14.81
7.41
Five-Year
20.00%
32.00
19.20
11.52
11.52
5.76
Seven-Year
14.29%
24.49
17.49
12.49
8.93
8.92
8.93
4.46
Transcribed Image Text: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 $2.55 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 $2.75 million
on an aftertax basis. In four years, the land could be sold for $2.95 million after taxes.
The company also hired a marketing firm to analyze the zither market, at a cost of
$305,000. 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
6,400, 7,100, 7,700, and 6,000 units each year for the next four years, respectively. Again,
capitalizing on the name recognition of PUTZ, we feel that a premium price of $490 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 $615,000 per year, and variable
costs are 15 percent of sales. The equipment necessary for production will cost $3.3
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 $545,000. Net
working capital of $255,000 will be required immediately. PUTZ has a tax rate of 23
percent, and the required return on the project is 10 percent. What is the NPV of the
project? (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.)
X Answer is complete but not entirely correct.
$
NPV
2,276,930.83
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