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QUESTION 1 1.1. United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existing warehouse, which is currently rented out to a neighbouring firm. The next year's rental charge on the warehouse is 100,000, and thereafter, the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of 1.2 million. This could be depreciated for tax purposes straight-line over 8 years. However, Pigpen expects to terminate the project at the end of 5 years and to resell the plant and equipment in year 5 for 500,000. Finally, the project requires an immediate investment in working capital of 350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 4. Working capital will be run down to zero in year 5 when the project shuts down. Year 1 sales of hog feed are expected to be 4.2 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs are expected to be 90% of sales, and profits are subject to tax at 25%. The cost of capital is 12%. REQUIRED: Prepare a cash flow projection statement for the project and determine the NPV of Pigpen's project? How do you interpret the NPV figure and explain in detail why this project should be accepted or rejected based on the NPV? (18%) 1.2. What is a project's payback period? Discuss and provide examples of the advantages and disadvantages of the payback period method. If a project has a payback period less than the lifetime of the project, can we know for sure whether the NPV will be positive or negative? (Maximum word limit for this 1.2 question is 750 words) (6%) (TOTAL 24%)

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