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 aftertax 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.
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 aftertax 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.
Chapter2: Income Tax Concepts
Section: Chapter Questions
Problem 79DC
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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 $2.9 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 aftertax 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 qualifies for 100 percent bonus depreciation in the first year. 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? (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.)
NPV
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