Consultant for Pristine Urban-Tech Zither, Inc.

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Part 1

Calculate the payback period, IRR, MIRR, NPV, and PI for the following two mutually exclusive projects. The required rate of return is 15% and the target payback is 4 years. Explain which project is preferable under each of the four capital budgeting methods mentioned above:

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Part 2

Study the following capital budgeting project and then provide explanations for the questions outlined below:

You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers (stringed instruments). 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% 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. Networking capital of $125,000 will be required immediately. PUTZ has a 38% tax rate, and the required rate of return on the project is 13%.

Now provide detailed explanations for the following:

Explain how you determine the initial cash flows.
Discuss the notion of sunk costs and identify the sunk cost in this project.
Verify how you determine the annual operating cash flows.
Explain how you determine the terminal cash flows at the end of the project’s life.
Calculate the NPV and IRR of the project and decide if the project is acceptable.
If the company that is implementing this project is a publicly traded company, explain and justify how this project will impact the market price of the company’s stock.
Provide detailed and precise explanations and definitions. Comment on your findings and provide references for content when necessary. Explain everything in your own words.

Sample Solution

An episode of The Flash entitled “Flashpoint” follows a superhero travelling to the past in an attempt to revive his mother.  By doing so, The Flash rewrites history and attains the life he had always envisioned.  He soon discerns that his actions do not come without ramifications as his new utopian world soon begins to combust, forcing him to reverse his path and scrape his way back to reality.  However, the life to which he returns does not mirror the one he once had.  The Flash essentially establishes three separate timelines: the flawed original, the self-destructive fantasy, and the altered reality.  Now, he can never return to his first life as he has sent it into oblivion. The same is true for the creator of the beloved television program Gilmore Girls, Amy Sherman-Palladino, who attempted to time travel to the past when she revived the show in the four-film series Gilmore Girls: A Year in the Life.  Because she left the original show before its conclusion, she viewed the reunion as her opportunity to rewrite the story’s ending.  As a result, three different timelines emerged: the show’s actual ending, Sherman-Palladino’s desired ending, and the revival’s re-creation of her vision.  Sherman-Palladino believed her revival would remedy the original show’s unfit conclusion, an idea that only further damaged the story and its characters.

Sherman-Palladino left Gilmore Girls in April 2006, a time when MySpace prevailed and Pluto was a planet.  There were no IPhones or African-American presidents.  Over the past decade, however, our society has undergone substantial changes, and so have we, the exception being Sherman-Palladino.  The moment she departed the show, she clicked pause and left her vision of the story in 2006.  A decade later, she found her way back to that outdated, no longer relevant remote control and hit “play”.  The revival picked up where Sherman-Palladino left off, a place that now existed solely in her imagination.  As a result, she implemented the concluding message she had envisioned in 2006 into the 2016 reunion series, essentially neglecting the elapsed time.  By ending with a single, pregnant Rory, Sherman-Palladino aimed to represent the circle of life through mirroring Lorelai’s past.  This pattern was an overarching theme throug

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