Task1. You have been appointed as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of the fine zithers. The market for zithers is growing rapidly. The company purchased some land three years ago for $1.4 million in expectancy of using it as a toxic waste dump site however has recently appointed another company to handle all toxic materials. Based on a recent appraisal, the company thinks it could sell the land for $1.5 million on an after-tax basis. In four years, the land could be sold for $1.6 million after taxes. The company also appointed a marketing firm to analyze the zither market, at a cost of $125,000. An excerpt of marketing report is as follows:
The zither industry will have a torque expansion in the upcoming four years. With the brand name recognition that PUTZ brings to bear, we feel that the company will be capable to sell 3,800, 4,700, 5,300, and 4,200 units each year for the next four years, correspondingly. Yet again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $650 can be charged for each zither. Because zithers appear to be a fad, we feel at the end of the four-year period, sales must be discontinued.
PUTZ believes which fixed costs for project will be $425,000 per year, and variable costs are 15 percent of sales. The equipment essential for production will cost $3.5 million and will be depreciated according to a 3-year MACRS schedule. At the end of project, the equipment can be scrapped for $400,000. Net working capital of $125,000 will be required instantaneously. PUTZ has a 38 percent tax rate, and the required return on project is 13 percent. Refer to Table.
What is the NPV of project?