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 $2.3 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 $2.5 million on an aftertax
basis. In four years, the land could be sold for $2.7 million after
taxes. The company also hired a marketing firm to analyze the
zither market, at a cost of $255,000. 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 5900, 6,600, 7,200, and 5,500 units each year for the next
four years, respectively. Again, capitalizing on the name
recognition of PUTZ, we feel that a premium price of $465 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 $515,000 per year, and variable costs are 20 percent of sales.
The equipment necessary for production will cost $3.05 million and
will be depreciated according to a three-year MACRS schedule. At
the end of the project, the equipment can be scrapped for $495,000.
Net working capital of $205,000 will be required immediately and
will be recovered at the end of the project. PUTZ has a 23 percent
tax rate, and the required return on the project is 13 percent.
What is the NPV of the project?