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 $110,000, 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 $1.26 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 $420,000. Finally, the project requires an immediate investment in working capital of $360,000. 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 $4.40 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 21%. The cost of capital is 12%. What is the NPV of Pigpen's project? (Enter your answer in thousands, not in millions, rounded to the nearest dollar.) NPV > Answer is complete but not entirely correct. $ 589,642 thousand
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 $110,000, 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 $1.26 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 $420,000. Finally, the project requires an immediate investment in working capital of $360,000. 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 $4.40 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 21%. The cost of capital is 12%. What is the NPV of Pigpen's project? (Enter your answer in thousands, not in millions, rounded to the nearest dollar.) NPV > Answer is complete but not entirely correct. $ 589,642 thousand
Chapter11: Cash Flow Estimation And Risk Analysis
Section: Chapter Questions
Problem 1cM
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Transcribed Image Text: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 $110,000, 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 $1.26 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 $420,000. Finally, the project requires
an immediate investment in working capital of $360,000. 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 $4.40 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 21%. The cost of
capital is 12%.
What is the NPV of Pigpen's project? (Enter your answer in thousands, not in millions, rounded to the nearest dollar.)
NPV
> Answer is complete but not entirely correct.
$
589,642 thousand
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