QUESTION $1$: PS$3$ Q$5.$ Calculating Project NPV$.$ 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 $$140,000$ 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 today for $$150,000$ on an aftertax

basis. In four years, the land could be sold for $$160,000$ after taxes. The company would like to

use the land as its production site for the zither project. The company also hired a marketing firm

to analyze the zither market, at a cost of $$125,000.$ Here is an excerpt from the marketing report:

$$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 $3,800,4,700,$

$5,300,$ and $4,200$ units each year for the next four years, respectively. 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 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 $$3\mathrm{.}5$ million and will be

depreciated according to a three$-$year straight line depreciation. 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 a $38$ percent tax rate, and the required return on the project is $13$ percent.

a$)($solve$)$ What is the NPV of the project? What is the IRR? Should PUTZ undertake this

project? Why?

$($Hint: take a look at the class example regarding land$)$