California State University Bakersfield Net Present Value Analysis Case Study


California State University Bakersfield

Question 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 as 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 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?

Provide your explanations and definitions in detail and be precise. Explain in your own words.

Note: Provide references for content when necessary. Support your statements with at-least 6 peer-reviewed in text citation(s) and reference(s).

Unformatted Attachment Preview

END.042.001.0013 BREALEY MYERS ALLEN The World of Finance in the Palm of Your Hand Principles pelesf of of Principles of Corporate Finance is the worldwide leading text that describes the theory and practice of corporate finance. Throughout the book, the authors show how managers use financial theory to solve practical problems and to manage change by showing not just how but why companies and management act as they do. Additions and updates to the Tenth Edition include: Useful Spreadsheet Functions boxes have been added to select chapters to highlight the most helpful Excel functions and spreadsheets when applying financial concepts. Numbered and Titled Examples are now called out and featured within chapters to further illustrate concepts. A new 4-color design, more real world examples, and increased international coverage make the book even more appealing and relevant to today’s students. CourseSmart is a new way to find and buy eTextbooks. At CourseSmart you can save up to 50% of the cost of your print textbook, reduce your impact on the environment, and gain access to powerful web tools for learning. You can search, highlight, take notes and share with friends, as well as print the pages you need. Try a free chapter to see if it’s right for you. Visit and search by title, author, or ISBN. Visit the Online Learning Center at for more information on Connect Plus Finance and for additional student and instructor resources. ISBN 978-0-07-353073-4 MHID 0-07-353073-5 Part of ISBN 978-0-07-735638-5 MHID 0-07-735638-1 9 0 0 0 0 EAN 9 780077 356385 ALLEN Principles p f of of Corporate Finance MD DALIM #1061980 12/6/09 CYAN MAG YELO BLK The text is now available with Connect and Connect Plus Finance, McGraw-Hill’s online assignment and assessment solution. Students can take self-graded practice quizzes, homework assignments, or tests, making the learning process more accessible and efficient. With Connect Plus Finance there is also an integrated, printable eBook, allowing for anytime, anywhere access to the textbook. finance MYERS TENTH EDITION OI TI D E HT N TENTH EDITION Corporate Finance Every chapter has been reviewed and revised to reflect the credit crisis, and many chapters have been rewritten for added simplicity and better flow. Please see the Preface for details. BREALEY confirming pages END.042.001.0013_002 Principles of Corporate Finance ● ● ● ● ● bre30735_fm_i-xxviii.indd i 12/18/09 5:17:10 PM confirming pages END.042.001.0013_003 THE MCGRAW-HILL/IRWIN SERIES IN FINANCE, INSURANCE, AND REAL ESTATE Stephen A. Ross, Franco Modigliani Professor of Finance and Economics, Sloan School of Management, Massachusetts Institute of Technology, Consulting Editor Financial Management Adair Excel Applications for Corporate Finance First Edition Block, Hirt, and Danielsen Foundations of Financial Management Thirteenth Edition Brealey, Myers, and Allen Principles of Corporate Finance Tenth Edition Brealey, Myers, and Allen Principles of Corporate Finance, Concise Second Edition Brealey, Myers, and Marcus Fundamentals of Corporate Finance Sixth Edition Brooks FinGame Online 5.0 Bruner Case Studies in Finance: Managing for Corporate Value Creation Sixth Edition Chew The New Corporate Finance: Where Theory Meets Practice Third Edition Cornett, Adair, and Nofsinger Finance: Applications and Theory First Edition DeMello Cases in Finance Second Edition Grinblatt (editor) Stephen A. Ross, Mentor: Influence through Generations Grinblatt and Titman Financial Markets and Corporate Strategy Second Edition Higgins Analysis for Financial Management Ninth Edition Kellison Theory of Interest Third Edition Kester, Ruback, and Tufano Case Problems in Finance Twelfth Edition Ross, Westerfield, and Jaffe Corporate Finance Ninth Edition bre30735_fm_i-xxviii.indd ii Ross, Westerfield, Jaffe, and Jordan Corporate Finance: Core Principles and Applications Second Edition Ross, Westerfield, and Jordan Essentials of Corporate Finance Seventh Edition Ross, Westerfield, and Jordan Fundamentals of Corporate Finance Ninth Edition Shefrin Behavioral Corporate Finance: Decisions That Create Value First Edition White Financial Analysis with an Electronic Calculator Sixth Edition Investments Saunders and Cornett Financial Institutions Management: A Risk Management Approach Seventh Edition Saunders and Cornett Financial Markets and Institutions Fourth Edition International Finance Eun and Resnick International Financial Management Fifth Edition Kuemmerle Case Studies in International Entrepreneurship: Managing and Financing Ventures in the Global Economy First Edition Bodie, Kane, and Marcus Essentials of Investments Eighth Edition Robin International Corporate Finance First Edition Bodie, Kane, and Marcus Investments Eighth Edition Real Estate Hirt and Block Fundamentals of Investment Management Ninth Edition Hirschey and Nofsinger Investments: Analysis and Behavior Second Edition Jordan and Miller Fundamentals of Investments: Valuation and Management Fifth Edition Stewart, Piros, and Heisler Running Money: Professional Portfolio Management First Edition Sundaram and Das Derivatives: Principles and Practice First Edition Financial Institutions and Markets Rose and Hudgins Bank Management and Financial Services Eighth Edition Rose and Marquis Money and Capital Markets: Financial Institutions and Instruments in a Global Marketplace Tenth Edition Brueggeman and Fisher Real Estate Finance and Investments Fourteenth Edition Ling and Archer Real Estate Principles: A Value Approach Third Edition Financial Planning and Insurance Allen, Melone, Rosenbloom, and Mahoney Retirement Plans: 401(k)s, IRAs, and Other Deferred Compensation Approaches Tenth Edition Altfest Personal Financial Planning First Edition Harrington and Niehaus Risk Management and Insurance Second Edition Kapoor, Dlabay, and Hughes Focus on Personal Finance: An Active Approach to Help You Develop Successful Financial Skills Third Edition Kapoor, Dlabay, and Hughes Personal Finance Ninth Edition 12/18/09 5:17:10 PM confirming pages END.042.001.0013_004 Principles of Corporate Finance TENTH EDITION Richard A. Brealey Professor of Finance London Business School Stewart C. Myers Robert C. Merton (1970) Professor of Finance Sloan School of Management Massachusetts Institute of Technology Franklin Allen Nippon Life Professor of Finance The Wharton School University of Pennsylvania bre30735_fm_i-xxviii.indd iii 12/18/09 5:17:11 PM confirming pages END.042.001.0013_005 PRINCIPLES OF CORPORATE FINANCE Published by McGraw-Hill/Irwin, a business unit of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY, 10020. Copyright © 2011, 2008, 2006, 2003, 2000, 1996, 1991, 1988, 1984, 1980 by The McGraw-Hill Companies, Inc. All rights reserved. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 3 2 1 0 ISBN 978-0-07-353073-4 MHID 0-07-353073-5 Vice president and editor-in-chief: Brent Gordon Publisher: Douglas Reiner Executive editor: Michele Janicek Director of development: Ann Torbert Senior development editor: Christina Kouvelis Development editor II: Karen L. Fisher Vice president and director of marketing: Robin J. Zwettler Marketing director: Rhonda Seelinger Senior marketing manager: Melissa S. Caughlin Vice president of editing, design, and production: Sesha Bolisetty Managing editor: Lori Koetters Lead production supervisor: Michael R. McCormick Interior and cover design: Laurie J. Entringer Senior media project manager: Susan Lombardi Cover image: © Jupiter Images Corporation Typeface: 10/12 Garamond BE Regular Compositor: Laserwords Private Limited Printer: R. R. Donnelley Library of Congress Cataloging-in-Publication Data Brealey, Richard A. Principles of corporate finance / Richard A. Brealey, Stewart C. Myers, Franklin Allen.—10th ed. p. cm.—(The McGraw-Hill/Irwin series in finance, insurance, and real estate) Includes index. ISBN-13: 978-0-07-353073-4 (alk. paper) ISBN-10: 0-07-353073-5 (alk. paper) 1. Corporations—Finance. I. Myers, Stewart C. II. Allen, Franklin, 1956-III. Title. HG4026.B667 2011 658.15—dc22 2009048209 bre30735_fm_i-xxviii.indd iv 12/18/09 5:17:11 PM confirming pages END.042.001.0013_006 To Our Parents bre30735_fm_i-xxviii.indd v 12/18/09 5:17:11 PM confirming pages END.042.001.0013_007 About the Authors ◗ Richard A. Brealey ◗ Stewart C. Myers ◗ Franklin Allen Professor of Finance at the London Business School. He is the former president of the European Finance Association and a former director of the American Finance Association. He is a fellow of the British Academy and has served as a special adviser to the Governor of the Bank of England and director of a number of financial institutions. Other books written by Professor Brealey include Introduction to Risk and Return from Common Stocks. Robert C. Merton (1970) Professor of Finance at MIT’s Sloan School of Management. He is past president of the American Finance Association and a research associate of the National Bureau of Economic Research. His research has focused on financing decisions, valuation methods, the cost of capital, and financial aspects of government regulation of business. Dr. Myers is a director of Entergy Corporation and The Brattle Group, Inc. He is active as a financial consultant. Nippon Life Professor of Finance at the Wharton School of the University of Pennsylvania. He is past president of the American Finance Association, Western Finance Association, and Society for Financial Studies. His research has focused on financial innovation, asset price bubbles, comparing financial systems, and financial crises. He is a scientific adviser at Sveriges Riksbank (Sweden’s central bank). bre30735_fm_i-xxviii.indd vi 12/18/09 5:17:11 PM confirming pages END.042.001.0013_008 Preface ◗ This book describes the theory and practice of corporate finance. We hardly need to explain why financial managers have to master the practical aspects of their job, but we should spell out why down-toearth managers need to bother with theory. Managers learn from experience how to cope with routine problems. But the best managers are also able to respond to change. To do so you need more than time-honored rules of thumb; you must understand why companies and financial markets behave the way they do. In other words, you need a theory of finance. Does that sound intimidating? It shouldn’t. Good theory helps you to grasp what is going on in the world around you. It helps you to ask the right questions when times change and new problems need to be analyzed. It also tells you which things you do not need to worry about. Throughout this book we show how managers use financial theory to solve practical problems. Of course, the theory presented in this book is not perfect and complete—no theory is. There are some famous controversies where financial economists cannot agree. We have not glossed over these disagreements. We set out the arguments for each side and tell you where we stand. Much of this book is concerned with understanding what financial managers do and why. But we also say what financial managers should do to increase company value. Where theory suggests that financial managers are making mistakes, we say so, while admitting that there may be hidden reasons for their actions. In brief, we have tried to be fair but to pull no punches. This book may be your first view of the world of modern finance theory. If so, you will read first for new ideas, for an understanding of how finance theory translates into practice, and occasionally, we hope, for entertainment. But eventually you will be in a position to make financial decisions, not just study them. At that point you can turn to this book as a reference and guide. ◗ Changes in the Tenth Edition We are proud of the success of previous editions of Principles, and we have done our best to make the tenth edition even better. What is new in the tenth edition? First, we have rewritten and refreshed several basic chapters. Content remains much the same, but we think that the revised chapters are simpler and flow better. These chapters also contain more real-world examples. • Chapter 1 is now titled “Goals and Governance of the Firm.” We introduce financial management by recent examples of capital investment and financing decisions by several well-known corporations. We explain why value maximization makes sense as a financial objective. Finally, we look at why good governance and incentive systems are needed to encourage managers and employees to work together to increase firm value and to behave ethically. • Chapter 2 combines Chapters 2 and 3 from the ninth edition. It goes directly into how present values are calculated. We think that it is better organized and easier to understand in its new presentation. • Chapter 3 introduces bond valuation. The material here has been reordered and simplified. The chapter focuses on default-free bonds, but also includes an introduction to corporate debt and default risk. (We discuss corporate debt and default risk in more detail in Chapter 23.) • Short-term and long-term financial planning are now combined in Chapter 29. We decided that covering financial planning in two chapters was awkward and inefficient. • Chapter 28 is now devoted entirely to financial analysis, which should be more convenient to instructors who wish to assign this topic early in their courses. We explain how the financial statements and ratios help to reveal the value, profitability, efficiency, and financial strength of a real company (Lowe’s). The credit crisis that started in 2007 dramatically demonstrated the importance of a well-functioning financial system and the problems that occur when it ceases to function properly. Some have suggested that the crisis disproved the lessons of modern finance. On the contrary, we believe that it was a wake-up call—a call to remember basic principles, including the importance of good systems of governance, proper vii bre30735_fm_i-xxviii.indd vii 12/18/09 5:17:12 PM confirming pages END.042.001.0013_009 viii Preface management incentives, sensible capital structures, and effective risk management. We have added examples and discussion of the crisis throughout the book, starting in Chapter 1 with a discussion of agency costs and the importance of good governance. Other chapters have required significant revision as a result of the crisis. These include Chapter 12, which discusses executive compensation; Chapter 13, where the review of market efficiency includes an expanded discussion of asset price bubbles; Chapter 14, where the section on financial institutions covers the causes and progress of the crisis; Chapter 23, where we discuss the AIG debacle; and Chapter 30, where we note the effect of the crisis on money-market mutual funds. The first edition of this book appeared in 1981. Basic principles are the same now as then, but the last three decades have also generated important changes in theory and practice. Research in finance has focused less on what financial managers should do, and more on understanding and interpreting what they do in practice. In other words, finance has become more positive and less normative. For example, we now have careful surveys of firms’ capital investment practices and payout and financing policies. We review these surveys and look at how they cast light on competing theories. Many financial decisions seem less clear-cut than they were 20 or 30 years ago. It no longer makes sense to ask whether high payouts are always good or always bad, or whether companies should always borrow less or more. The right answer is, “It depends.” Therefore we set out pros and cons of different policies. We ask “What questions should the financial manager ask when setting financial policy?” You will, for example, see this shift in emphasis when we discuss payout decisions in Chapter 16. This edition builds on other changes from earlier editions. We recognize that financial managers work more than ever in an international environment and therefore need to be familiar with international differences in financial management and in financial markets and institutions. Chapters 27 (Managing International Risks) and 33 (Governance and Corporate Control around the World) are exclusively devoted to international issues. We have also found more and more opportunities in other chapters to draw cross-border comparisons or use non-U.S. examples. We hope that this material will both provide a better understanding of the wider financial environment and be useful to our many readers around the world. As every first-grader knows, it is easier to add than to subtract. To make way for new topics we have bre30735_fm_i-xxviii.indd viii needed to make some judicious pruning. We will not tell you where we have cut out material, because we hope that the deletions will be invisible. ◗ Making Learning Easier Each chapter of the book includes an introductory preview, a summary, and an annotated list of suggested further reading. The list of possible candidates for further reading is now voluminous. Rather than trying to list every important article, we have largely listed survey articles or general books. More specific references have been moved to footnotes. Each chapter is followed by a set of basic questions, intermediate questions on both numerical and conceptual topics, and a few challenge questions. Answers to the odd-numbered basic questions appear in an appendix at the end of the book. We have added a Real-Time Data Analysis section to chapters where it makes sense to do so. This section now houses some of the Web Projects you have seen in the previous edition, along with new Data Analysis problems. These exercises seek to familiarize the reader with some useful Web sites and to explain how to download and process data from the Web. Many of the Data Analysis problems use financial data that the reader can download from Standard & Poor’s Educational Version of Market Insight, an exclusive partnership with McGraw-Hill. The book also contains 10 end-of-chapter minicases. These include specific questions to guide the case analyses. Answers to the mini-cases are available to instructors on the book’s Web site. Spreadsheet programs such as Excel are tailor-made for many financial calculations. Several chapters now include boxes that introduce the most useful financial functions and provide some short practice questions. We show how to use the Excel function key to locate the function and then enter the data. We think that this approach is much simpler than trying to remember the formula for each function. Many tables in the text appear as spreadsheets. In these cases an equivalent “live” spreadsheet appears on the book’s Web site. Readers can use these live spreadsheets to understand better the calculations behind the table and to see the effects of changing the underlying data. We have also linked end-of-chapter questions to the spreadsheets. We conclude the book with a glossary of financial terms. The 34 chapters in this book are divided into 11 parts. Parts 1 to 3 cover valuation and capital investment decisions, including portfolio theory, asset 12/18/09 5:17:13 PM confirming pages END.042.001.0013_ ...
Purchase answer to see full attachment
Student has agreed that all tutoring, explanations, and answers provided by the tutor will be used to help in the learning process and in accordance with Studypool's honor code & terms of service.

Final Answer

I had not noticed that you need a five page paper and on top of that an excel. Please make the payment at least 30$, I have done a lot of work


Net Present Value Analysis
Student’s Name
Institution Affiliation


Net Present Value Analysis
In an organization, the amounts of resources given to the project play an important role in
determining the success of the organization project, and if a firm fails to allocate the resource in
the right place, such decisions are difficult to reverse without disturbing the organization
economically and financially (Baucells et al, 2018). Capital budgeting is a crucial decision as it
requires a huge capital allotment and a wrong decision could bleed a lot of money which could
be catastrophic for a business. Pristine Urban-Tech Zither, Inc. (PUTZ) PUTZ Inc. is facing
capital budgeting issue. Therefore, the calculation for PUTZ NPV is:

The NPV is $833,829.90




Interpretation and Definitions of the Results
NPV analysis is used in determining the value or worthiness of investment, project or any series
of cash flows. As such, it is an all-encompassing metric that takes into account sales revenues,
capital costs, and expense that all associated with the investment in its Free Cash Flow.
Therefore, all results in the above image are explained in this discussion.
In order to calculate NPV, the company has outlined the units of fine zithers that it intends to sell
for the next four years, i.e., sale quantity. As such, sale quantity is sale volume defined as the
number of units the company intends to record annually for the next four years. As well, the
company indicated that the price unit for each zither is $750. Sale volume and prices help in
calculating the expected sale revenue for the company
Sale revenue is defined as the amount that a business generates from the sale of goods or
services. As such, Pristine Urban-Tech Zither, Inc. (PUTZ) has established the price of the one
zither is $750 and the intended volume for each year is provided as 3600, 4300, 5200 and 3900.
Therefore, sales revenue is calculated by multiplying the price per unit by sale volume.
For example, the sale revenue f...

ChrisLabreTutor (20987)
UC Berkeley

Just what I was looking for! Super helpful.