Petaluma Chicken, Inc. is considering a new organic chicken farm to service it's western regional stores and has hired you as a consultant to make a recommendation. The stores currently require 500,000 birds per year and they are purchased from various local chicken farms for an average price of $3 per bird.
The managers believe that their new organic farm would raise the cost per bird to $4, while raising the average selling price to $8.50 per bird from $6.50 per bird now. However, due to the centralized structure of the is operation, shipping expenses will likely decrease from $1.00 per bird to $0.75. The firm feels it will need to increase its inventory of live birds by $15,000, and it will cost $150,000 to purchase the land, and $300,000 to construct the buildings and purchase equipment. In addition, labor expense is expected to rise by $130,000 per year.
The buildings and equipment will be depreciated using the straight-line method over five years to a salvage value of $100,000. After five years, the company will sell the farm for $300,000 (Base case estimate is $100,000 for the buildings and equipment and $200,000 for the land). The firms tax rate is 35% and be sure you remember that land is not depreciable.
Given that, construct a spread sheet that calculates the initial outlay, after tax cash flows, and terminal cash flow for the project. The companys cost of capital is 11%, find NPV and IRR. Using that, decide if this is a go or no go project. Then do any other analysis you think might be useful to the CEO. When complete, construct a memo that will inform the CEO of your findings and your suggested course of action.
Next week, three different market scenarios will be added. You will learn how to conduct the what-if or scenario analysis in that week. 
B D E F G 1 Petaluma Chicken Data Annotation 2 Old Situation New Situation 3 Chickens per Year Given Same 4 Cost per Chicken Given Given 5 Shipping Cost per Chiken Given Given 6 Selling Price Given Same 7 Total Cost per Chicken Calc Calc Add cost and shipping 8 Additional Gross Profit per Chicken calc Subtract old price minus old cost from new price minus new cost 9 Investment in Additional Chicken Given One time investment in increased inventory 10 Land Cost Given 11 Buildings Cost Given 12 Labor Expense Given 13 Depreciation Salvage Value (Buildings) Given 14 Annual Depreciation Expense Calc Cost - salvage value divided by years 15 Actual Salvage Value (Land) Given 16 Actual Salvage Value (Buildings) Given 17 Life of Project Given 18 Tax Rate Given 19 Weighted Average Cost of Capital Given 20 21 Cash Flow 22 Initial Outlay Calc Cost of land, buildings and increase in inventory 23 24 Annual After-tax Cash Flow Calc Turkeys per year times additional profit minus labor + depreciation. 25 Then multiply by 1-tax rate to get after tax net income then add back depreciation as it's not cash 26 27 Terminal Cash Flow Calc Sell off land, buildings and inventory while accounting for taxes 28 So actual salvage value building minus any taxes due on the difference of the actual salvage value and the depreciated salvage value. 29 Plus the actual salvage value on the land minus any taxes due on the difference of the actual salvage value and the land cost 30 Plus selling off the increased inventory (sold at same price as bought) 31 Period 0 1 2 3 Cash Flow Calc Calc Calc Calc Calc Calc Initial outlay After tax CF from above After tax CF from above After tax CF from above After tax CF from above After tax CF from above plus the terminal cash flow from above 4 5 Profitability Measures NPV Calc Use NPV calculation in excel just use =NPV and fill it out IRR Calc Use IRR calculation in excel just use =IRR and fill it out B D E F G 1 Petaluma Chicken Data Annotation 2 Old Situation New Situation 3 Chickens per Year Given Same 4 Cost per Chicken Given Given 5 Shipping Cost per Chiken Given Given 6 Selling Price Given Same 7 Total Cost per Chicken Calc Calc Add cost and shipping 8 Additional Gross Profit per Chicken calc Subtract old price minus old cost from new price minus new cost 9 Investment in Additional Chicken Given One time investment in increased inventory 10 Land Cost Given 11 Buildings Cost Given 12 Labor Expense Given 13 Depreciation Salvage Value (Buildings) Given 14 Annual Depreciation Expense Calc Cost - salvage value divided by years 15 Actual Salvage Value (Land) Given 16 Actual Salvage Value (Buildings) Given 17 Life of Project Given 18 Tax Rate Given 19 Weighted Average Cost of Capital Given 20 21 Cash Flow 22 Initial Outlay Calc Cost of land, buildings and increase in inventory 23 24 Annual After-tax Cash Flow Calc Turkeys per year times additional profit minus labor + depreciation. 25 Then multiply by 1-tax rate to get after tax net income then add back depreciation as it's not cash 26 27 Terminal Cash Flow Calc Sell off land, buildings and inventory while accounting for taxes 28 So actual salvage value building minus any taxes due on the difference of the actual salvage value and the depreciated salvage value. 29 Plus the actual salvage value on the land minus any taxes due on the difference of the actual salvage value and the land cost 30 Plus selling off the increased inventory (sold at same price as bought) 31 Period 0 1 2 3 Cash Flow Calc Calc Calc Calc Calc Calc Initial outlay After tax CF from above After tax CF from above After tax CF from above After tax CF from above After tax CF from above plus the terminal cash flow from above 4 5 Profitability Measures NPV Calc Use NPV calculation in excel just use =NPV and fill it out IRR Calc Use IRR calculation in excel just use =IRR and fill it out
