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 $125,000, 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 $1.35 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 $450,000. Finally, the project requiresan immediate Investment in working capital of $375,000. 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 $4.70 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 35%. The cost ofcapital is 12%.What is the NPV of Pigpen's project? (Enter your answer in dollars not in millions.)NPV

Initial cost = $1,350,000Sales = $470,000Manufacturing cost = 90% of salesInflation rate =4%Tax rate…

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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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, 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 $1.77 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 $590,000. Finally, the project requires an immediate investment in working capital of $445,000. 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 $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
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