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 $195,000, and thereafter, therent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages an investment inplant and equipment of $1.77 million. This could be depreciated for tax purposes straight-line over 10 years. However, Pigpen expectsto terminate the project at the end of 8 years and to resell the plant and equipment in year 8 for $590,000. Finally, the project requiresan immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightlyfaster than the inflation rate. Manufacturing costs are expected to be 90% of sales, and profits are subject to tax at 21%. The cost ofcapital is 12%.What is the NPV of Pigpen's project? (Enter your answer in thousands, not in millions, rounded to the nearest dollar.)NPVthousand

NPV is defined as the sum of the present values of all future cash inflows less the sum of the…

Answered: United Pigpen is considering a proposal…

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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A tool and die company in Hanover is considering the purchase of a drill press with fuzzy - logic software to improve accuracy and reduce tool wear . The company has the opportunity to buy a slightly used machine for $ 15,000 or a new one for $ 21,000 . Because the new machine is a more sophisticated model , its operating cost is expected to be $ 7000 per year , while the used machine is expected to require $ 8200 per year . Each machine is expected to have a 25 - year life with a 5 % salvage value . Using ROR method , calculate which one is more profitable for the company MARR is 10 %.
Cisco is considering the development of a wireless home networking appliance, called HomeNet. The company expects to sell 370000 units per year over the project's life at an expected wholesale price of 170. Actual production will be outsourced at a cost of 96 per unit. Additionally, the company will spend $27000 in interest expense each year towards financing the project. In year 1, the firm must increase its accounts receivable by $870000, which will return to regular levels at the end of the project. The company spent $291000 last year on software to develop the router. $106.8 million of new equipment will be purchased and then depreciated using the straight - line method over a 10-year life. They expect the market value of the equipment to depreciate at 6.6% per year. The project is expected to end in year 7. The current tax rate is 21%. Use this rate for both income tax rate and the capital gains rate. The WACC for the company is 12.6%. What is the NPV of the project?
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Ivanhoe Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.85 million. This investment will consist of $2.15 million for land and $9.70 million for trucks and other equipment. The land, all trucks, and all other equipment are expected to be sold at the end of 10 years for a price of $5.25 million, which is $2.00 million above book value. The farm is expected to produce revenue of $2.10 million each year, and annual cash flow from operations equals $1.90 million. The marginal tax rate is 25 percent, and the appropriate discount rate is 10 percent. Calculate the NPV of this investment? (Do not round factor values. Round final answer to 2 decimal places, e.g. 15.25.)
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Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $28.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.30 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.20 million per year and cost $1.77 million per year over the 10-year life of the project. Marketing estimates 12.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 24.00%. The WACC is 12.00%. Find the NPV (net present value). Submit Answer format: Currency: Round to: 2 decimal places.
Cisco is considering the development of a wireless home networking appliance, called HomeNet. The company expects to sell 370000 units per year over the project's life at an expected wholesale price of 170. Actual production will be outsourced at a cost of 96 per unit. Additionally, the company will spend $27000 in interest expense each year towards financing the project. In year 1, the firm must increase its accounts receivable by $870000, which will return to regular levels at the end of the project. The company spent $291000 last year on software to develop the router. $106.8 million of new equipment will be purchased and then depreciated using the straight line method over a 10-year life. They expect the market value of the equipment to depreciate at 6.6% per year. The project is expected to end in year 7. The current tax rate is 21%. Use this rate for both income tax rate and the capital gains rate. The WACC for the company is 12.6%. What is the NPV of the project?μ-

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