United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...

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United Pigpen is considering a proposal to manufacturehigh-protein hog feed. The project would make use of an existingwarehouse, which is currently rented out to a neighboring firm. Thenext year’s rental charge on the warehouse is $100,000, andthereafter, the rent is expected to grow in line with inflation at4% a year. In addition to using the warehouse, the proposalenvisages an investment in plant and equipment of $1.2 million.This could be depreciated for tax purposes straight-line over 10years. However, Pigpen expects to terminate the project at the endof 8 years and to resell the plant and equipment in year 8 for$400,000. Finally, the project requires an immediate investment inworking capital of $350,000. Thereafter, working capital isforecasted to be 10% of sales in each of years 1 through 7. Year 1sales of hog feed are expected to be $4.2 million, and thereafter,sales are forecasted to grow by 5% a year, slightly faster than theinflation rate. Manufacturing costs are expected to be 90% ofsales, and profits are subject to tax at 35%. The cost of capitalis 12%. What is the NPV of Pigpen’s project? (Enter your answer indollars not in millions.)

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3.7 Ratings (477 Votes)

0 1 2 3 4 5 6 7 8 Sales 4200000 4410000 4630500 4862025 5105126 5360383 5628402 5909822 Manufacturing costs 90 of sales 3780000 3969000 4167450 4375823 4594614 4824344 5065562 5318840 Depreciation 120000010 120000 120000 See Answer

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United Pigpen is considering a proposal to manufacturehigh-protein hog feed. The project would make use of an existingwarehouse, which is currently rented out to a neighboring firm. Thenext year’s rental charge on the warehouse is $100,000, andthereafter, the rent is expected to grow in line with inflation at4% a year. In addition to using the warehouse, the proposalenvisages an investment in plant and equipment of $1.2 million.This could be depreciated for tax purposes straight-line over 10years. However, Pigpen expects to terminate the project at the endof 8 years and to resell the plant and equipment in year 8 for$400,000. Finally, the project requires an immediate investment inworking capital of $350,000. Thereafter, working capital isforecasted to be 10% of sales in each of years 1 through 7. Year 1sales of hog feed are expected to be $4.2 million, and thereafter,sales are forecasted to grow by 5% a year, slightly faster than theinflation rate. Manufacturing costs are expected to be 90% ofsales, and profits are subject to tax at 35%. The cost of capitalis 12%. What is the NPV of Pigpen’s project? (Enter your answer indollars not in millions.)