A firm is considering a proposal to manufacture chicken feed. The project would require renting an existing warehouse. The next year's rental charge on the warehouse is $100,000, and thereafter the rent is expected to grow 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 10 years. However, the firm expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in working capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. (None in year 8.) Year 1 sales of chicken feed are expected to be $4.2 million, and thereafter sales are forecasted to grow by 5% a year. Manufacturing costs are expected to be 90% of sales, and profits are subject to tax at 35%. The cost of capital is 12%.

What is the NPV of the project given the above assumptions? What should the firm do?

What percentage of working capital relative to sales would be required to have a NPV of zero? (Currently the number is 10%) Create a data table with the NPV as the output variable. The column input is the growth rate in sales, starting at 4.25% and ending at 5.75% with increments of 0.25%. The row input is the manufacturing costs as a percentage of sales, starting with 88% and ending at 90% with increments of 0.5%.

	0	1	2	3	4	5	6	7	8
Sales
manufacturing costs
depreciation
rent
earnings before taxes
taxes
cash flow-operations
working capital
changes in working capital
initial investment
sale of plant
tax on sale
net cash flow
NPV(at 12%)=