Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

United Pigpen is considering a proposal to manufacture high - protein hog feed. The project would make use of an existing warehouse, which is currently

United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use of an existing warehouse,
which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $165,000, 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 $1.59 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expects
to terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $530,000. Finally, the project requires
an immediate investment in working capital of $415,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1
through 7. Year 1 sales of hog feed are expected to be $5.50 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 35%. The cost of
capital is 12%.
What is the NPV of Pigpen's project?
Note: Enter your answer in thousands, not in millions, rounded to the nearest dollar.
NPV
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Investment Science

Authors: David G. Luenberger

2nd Edition

0199740089, 978-0199740086

More Books

Students also viewed these Finance questions