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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 $1.37 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 $1,470,000 on an aftertax basis. In four years, the land could be sold for $1,570,000 after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $122,000. 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 3,500, 4,400, 5,000, 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 $620 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 feels that fixed costs for the project will be $410,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $3.2 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $385,000. Net working capital of $122,000 will be required immediately and will be recaptured at the end of the project. PUTZ has a 40 percent tax rate, and the required return on the project is 14 percent. Assume the company has other profitable projects. Table 8.3.

What is the NPV of the project? (Do not round intermediate calculations and round your final answer to 2 decimal places.)

TABLE 8.3 Depreciation under Modified Accelerated Cost Recovery System (MACRS RECOVERY PERIOD CLASS YEAR 3 YEARS 5 YEARS 7 YEARS 10 YEARS 15 YEARS 20 YEARS 3333 03750 2000 1429 1000 0500 2449 0950 07219 4445 3200 1800 06677 1481 1920 1749 1440 0855 .1152 0741 1249 1152 0770 06177 .1152 0693 0893 0922 05713 05285 0623 0576 .0892 0737 0590 04888 0893 0655 0590 0446 0655 04522 0656 0591 04462 04461 10 0655 0590 11 0328 0591 04462 0590 04461 12 13 0591 04462 0590 04461 04462 15 0591 04461 16 0295 04462 17 18 04461 04462 19 04461 21 02231 Depreciation is expressed as a percent of the asset's cost. These schedules are based on the IRS publication 946. How to Depreciate Property and other details on depreciation are presented later in the chapter. Note that five-year depreciation actually carries over six yearsbecause the IRS assumes purchase is made in midyear