BUSA 5062 Finance Problem

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1.       Calculating project NPV [LO01]  You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufactures of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago $1.4 million in anticipation of using it as a toxic waste dump site but has recently hired another company to handle all toxic materials. Based n a recent appraisal, the company believes it could sell the land for $1.5 million on an aftertax basis. 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 2,800 units each year for brand name recognition that PUTZ brings to bear, we feel that the company will be able to sell 3,200,4,300, 3,900, and each year for the next four years, respectively. Again, capitalizing on the name recognizing of PUTZ, we feel that a premium price of $ 780 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 $425,000 per year, and variable costs are 15 percent of sales. The equipment necessary for production will cost $4.2 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $400,000. Net working capital of $125,000 will be required immediately. PUTZ has a38 percent tax rate, and the required return on the project is 13 percent. What is the NPV of the project? Assume the company has other profitable projects.

2.       Project Evaluation: [LO1] Aguilera Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:

Year	Unit Sales
1	93,000
2	105,000
3	128,000
4	134,000
5	87,000

Production of the implants will require $1,800,000 in net working capital to start and additional net working capital investments each year equal to 15 percent of the projected sales increase for the following year. Total fixed costs are $1,200,000per year, variable production costs are $265 per unit, and the units are priced at $380 each. The equipment needed to begin production has an installed cost of $24,000,000. Because the implants are intended for professional singers, this equipment is considered industrial machinery and thus qualifies as seven-year MACRS property. Base on these preliminary project estimates, what is the NPV of the project? What is the IRR?