Indiana State University Accounting NPV of Project Worksheet

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xnggnfnvx187

Business Finance

Indiana State University

Description

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 capital of $125,000 will be required immediately. PUTZ has a 38 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project?


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Attached.

Running head: PRISTINE URBAN-TECH NPV

Pristine Urban-tech NPV analysis
Name
Institution affiliations
Date

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PRISTINE URBAN-TECH NPV ANALYSIS

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Introduction
According to Baucells, M., & Bodily, (2018), the need for the net present value in a firm
is so essential that the company will realize how profitable the project will be should they invest,
and how much profit will the project add to the company. The investment decision will be
derived from the nature of NPV that firms have. Investing in NPV based project is too risky due
to the time value of money and the payback period (PB) of an investment. In this regard, Pristine
Urban-Tech Zither should use the NPV model to decide whether or not the project is worth
investment, depending on the state of the NPV.
Time value for money use NPV analysis and the tables to discount net cash flows of a
project (Rich, Rose & Delaney, 2018). Notably, other non-discounting net cash flows of a firm
comes after the net profit is added to the depreciation charges i. e NCF= E+H. MACRS
depreciation if using the tables ...


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