1) Use an Excel spreadsheet to solve problem #31 (the PUTZ, Inc. project) for Chapter 10 in the textbook.
2) Conduct a sensitivity analysis that focuses on the sales price by increasing the price by 10% above the best estimate, and then by decreasing the price by 10% below the best estimate.
3) You must provide one spreadsheet for each of the three situations—the base case estimate, the best case, and the worst case.
4) What do you recommend? Explain. You may type your recommendation and explanation on the Excel sheet. MAXIMIZE THE USE OF FORMULAS! NOTE: THIS INCLUDES USING CELL ADDRESSES RATHER THAN NUMBERS IN THE FORMULAS
I typed this straight from the book, below is problem #31 (Chapter 10)
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 3 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 aftertax basis. In 4 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 capital of $125,000 will be required immediately and will be recovered at the end of the project. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project?