Project NPV 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 $100,000, 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 $1.2 million. This could be depreciated for tax purposes over 10 years. However, Pigpen 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 I through 7. Year I sales of hog feed are expected to be $4.2 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 25%. The cost of capital is 12%. What is the NPV of Pigpen's project?
Project NPV 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 $100,000, 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 $1.2 million. This could be depreciated for tax purposes over 10 years. However, Pigpen 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 I through 7. Year I sales of hog feed are expected to be $4.2 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 25%. The cost of capital is 12%. What is the NPV of Pigpen'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
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13. Project NPV 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 S100,000, 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 $1.2 million. This could be
depreciated for tax purposes over 10 years. However, Pigpen 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 S350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7.
Year I sales of hog feed are expected to be $4.2 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 25%. The cost of capital is 12%. What is the NPV of Pigpen's project?
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