Mamafu is considering a proposal to manufacture high-protein cricket snacks. 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 $120,000, and thereafter the rent is expected to grow in line with inflation at 3% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.5 million. This could be depreciated for tax purposes over 10 years. However, Mamafu expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $500,000. Finally, the project requires an initial investment in working capital of $400,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of cricket snacks are expected to be $4 million, and thereafter sales are forecasted to grow by 4% a year, slightly faster than the inflation rate. Manufacturing costs are expected to be 80% of sales, and profits are subject to tax at 25%. The cost of capital is 12%. What is the NPV of Mamafu's project?

Mamafu is considering a proposal to manufacture high-protein cricket snacks. 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 $120,000, and thereafter the rent is expected to grow in line with inflation at 3% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.5 million. This could be depreciated for tax purposes over 10 years. However, Mamafu expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $500,000. Finally, the project requires an initial investment in working capital of $400,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of cricket snacks are expected to be $4 million, and thereafter sales are forecasted to grow by 4% a year, slightly faster than the inflation rate. Manufacturing costs are expected to be 80% of sales, and profits are subject to tax at 25%. The cost of capital is 12%. What is the NPV of Mamafu's project?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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