Finance EAC and NPV

Please answer the two following finance problems:

#1) 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 $1.31 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 $1.41 million on an aftertax basis. In four years, the land could be sold for $1.51 million after taxes. The company also hired a marketing firm to analyze the zither market, at a cost of $116,000. 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 2,900, 3,800, 4,400, and 3,300 units each year for the next four years, respectively. Again, capitalizing on the name recognition of PUTZ, we feel that a premium price of $560 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 $380,000 per year, and variable costs are 10 percent of sales. The equipment necessary for production will cost $2.6 million and will be depreciated according to a three-year MACRS schedule. At the end of the project, the equipment can be scrapped for $355,000. Net working capital of $116,000 will be required immediately. PUTZ has a 40 percent tax rate, and the required return on the project is 14 percent. (**SEE MACRS schedule ATTACHED****)

What is the NPV of the project? (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

#2) Vandelay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,144,000 and will last for six years. Variable costs are 30 percent of sales, and fixed costs are $280,000 per year. Machine B costs $5,373,000 and will last for nine years. Variable costs for this machine are 25 percent of sales and fixed costs are $215,000 per year. The sales for each machine will be $11.8 million per year. The required return is 9 percent, and the tax rate is 34 percent. Both machines will be depreciated on a straight-line basis. The company plans to replace the machine when it wears out on a perpetual basis.

Calculate the EAC for each machine. (Enter your answer in dollars, not millions of dollars, e.g. 1,234,567. Negative amounts should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

 
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