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 $2.1 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 $2.3 million on an after-tax basis. In four years, the land could be sold for $2.4 million after taxes. The company also hired a marketing firm to analyze 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 3,600, 4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 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 $415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $3.5 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working BUS 550 Syllabus 13 of capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%. Explain how you determine the terminal cash flows at the end of the project’s life ● Calculate the NPV and IRR of the project and decide if the project is acceptable ● If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock
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 $2.1 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 $2.3 million on an after-tax basis. In
four years, the land could be sold for $2.4 million after taxes. The company also hired a
marketing firm to analyze 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 3,600,
4,300, 5,200, and 3,900 units each year for the next four years, respectively. Again,
capitalizing on the name recognition of PUTZ, we feel that a premium price of $750 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
$415,000 per year, and variable costs are 15 percent of sales. The equipment necessary for
production will cost $3.5 million and will be
schedule. At the end of the project, the equipment can be scrapped for $350,000. Net working
BUS 550 Syllabus
13 of
capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required
rate of return on the project is 13%.
- Explain how you determine the terminal cash flows at the end of the project’s life
● Calculate the NPV andIRR of the project and decide if the project is acceptable
● If the company that is implementing this project is a publicly traded company, explain
and justify how this project will impact the market price of the company’s stock
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