United Pigpen (UP) is considering a proposal to manufacture high protein hog feed. The project would make use of an existingwarehouse, which is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $260,000, andthereafter the rent is expected to grow in line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages aninvestment in plant and equipment of $3.1 million. This could be depreciated for tax purposes over 10 years. However, UP expects toterminate the project at the end of eight years and to resell the plant and equipment in year 8 for $1,040,000. Finally, the projectrequires an initial investment in working capital of $910,000. Thereafter, working capital is forecasted to be 10% of sales in each ofyears 1 through 7. Year 1 sales of hog feed are expected to be $10.9 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%. Thecost of capital is 12%. What is the NPV of UP's project?Note: Do not round your intermediate calculations. Enter your answer in thousands rounded to 1 decimal place.NPV

In the NPV analysis, we compute the present value of all future benefits. This present value is then…

Answered: United Pigpen (UP) is considering a…

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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Brown Company is considering purchasing a machine that would cost $320,000 and would last for 6 years. At the end of 6 years, the machine would have a salvage value of $50,000. The machine would provide annual cost savings of $75,000. The company requires a rate of return of 11% on all investment projects. What is the net present value of the proposed project? (Select the answer that is closest to your calculations.) Present value tables are provided below. Present Value of $1 Table (Exhibit 11B-1) (Partial table) Periods 4% 5% 6% 7% 8% 9% 10% 11 12% 13% 14% 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 1 2. 4 5. 6 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.760 0.711 0.665 0.623…
Galvanized Products is considering purchasing a new computer system for their enterprise data management system. The vendor has quoted a purchase price of $100,000. Galvanized Products is planning to borrow one-fourth of the purchase price from a bank at 15% compounded annually. The loan is to be repaid using equal annual payments over a 3-year period. The computer system is expected to last 5 years and has a salvage value of $4,000 at that time. Over the 5-year period, Galvanized Products expects to pay a technician $27,000 per year to maintain the system but will save $57,000 per year through increased efficiencies. Galvanized Products uses a MARR of 14%/year to evaluate investments. a. What is the external rate of return of this investment? ERR = % Do all calculations to 5 decimal places and round your final answer to 2 decimal places. Tolerance is +/-.2
A firm is considering an investment in a new machine with a price of $17.6 million to replace its existing machine. The current machine has a book value of $7.3 million and a market value of $6 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $7.25 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $440,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 24 percent. The company uses straight-line depreciation. What is the NPV of the decision to purchase a new machine? (Do not round intermediate calculations and enter your answer in dollars, not millions, rounded to 2 decimal places, e.g., 1,234,567.89.) What is the IRR of the decision to purchase a…
Colorado Cleaning has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new washing machine and must choose between two alternative The first machine requires an initial investment of $25,000 and generates annual after-tax cash inflows of $6,500 for each of the next 8 years. The second machine requires an initial investment of $75,000 and provides an annual cash inflow after taxes of $9,500 for 15 years. Which machine should the firm accept? Why?
A firm is considering an investment in a new machine with a price of $15.9 million to replace its existing machine. The current machine has a book value of $5.7 million and a market value of $4.4 million. The new machine is expected to have a 4-year life, and the old machine has four years left in which it can be used. If the firm replaces the old machine with the new machine, it expects to save $6.45 million in operating costs each year over the next four years. Both machines will have no salvage value in four years. If the firm purchases the new machine, it will also need an investment of $280,000 in net working capital. The required return on the investment is 11 percent and the tax rate is 23 percent. The company uses straight-line depreciation. a)- What is the NPV of the decision to purchase the new machine? b) What is the IRR of the decision to purchase the new machine? c) WHat is the NPV of the decison to keep using the old machine? d) What is the IRR of the decison to keep…
Thunderbolt Corporation is considering an investment project to produce electric gadgets. Cathie Wood projected unit sales of these gadgets to be 10,000 in the first year, with growth of 6.5 percent each year over the subsequent five years (so the total project life is six years). Production of these gadgets will require $1,200,000 in net working capital to start. The net working capital will be recovered at the end of the project. Total fixed costs are $3,000,000 per year, variable production costs are $350 per unit, and the units are priced at $850 each. The equipment needed to begin production will cost $8,400,000. The equipment will be depreciated using the straight-line method over a six-year life and has a pre-tax salvage value of $520,000 when the project closes. The tax rate is 25%. a) Using Excel, set up a table that shows your detailed calculation with formulas of the project cash flows for each year throughout the life of the project.
Cisco is considering the development of a wireless home networking appliance, called HomeNet. The company expects to sell 300000 units per year over the project's life at an expected wholesale price of 170. Actual production will be outsourced at a cost of 93 per unit. Additionally, the company will spend $21000 in interest expense each year towards financing the project. In year 1, the firm must increase its accounts receivable by $854000, which will return to regular levels at the end of the project. The company spent $285000 last year on software to develop the router. $101.8 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 2.8% 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 12.4%.áWhat is the NPV of the project? $21,604,034.24…
Blossom Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $11.95 million. This investment will consist of $2.60 million for land and $9.35 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 $5.20 million, which is $2.25 million above book value. The farm is expected to produce revenue of $2.05 million each year, and annual cash flow from operations equals $1.95 million. The marginal tax rate is 25 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 5,275.25.) NPV $ The project should b accepted rejected
Munch N' Crunch Snack Company is considering two possible investments: a delivery truck or a bagging machine. The delivery truck would cost $43,056 and could be used to deliver an additional 95,000 bags of pretzels per year. Each bag of pretzels can be sold for a contribution margin of $0.45. The delivery truck operating expenses, excluding depreciation, are $1.35 per mile for 24,000 miles per year. The bagging machine would replace an old bagging machine, and its net investment cost would be $61,614. The new machine would require three fewer hours of direct labor per day. Direct labor is $18 per hour. There are 250 operating days in the year. Both the truck and the bagging machine are estimated to have 7-year lives. The minimum rate of return is 13%. However, Munch N' Crunch has funds to invest in only one of the projects. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 2 3 4 5 6 7 8 9 10 0.943 1.833 2.673 3.465 4.212 4.917 5.582 6.210 6.802 7.360…
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require 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 4% a year. In addition to using the warehouse, the proposal envisages an investment in plant and equipment of $1.32 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 $440,000. Finally, the project requires an immediate investment in working capital of $370,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $4.60 million, and thereafter, sales are forecasted…
A firm is considering a 3yr project to improve its production efficiency. Buying a new machine for $375,000 is estimated to result in operating cash flow of $155,000. The after tax salvage value would be $42,000. The machine also requires an initial investment in working capital of $26,000. Given the discount rate is 9 percent, calculate the project's NPV.
Crane Company is considering buying a new farm that it plans to operate for 10 years. The farm will require an initial investment of $12.10 million. This investment will consist of $2.65 million for land and $9.45 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 $5.15 million, which is $2.20 million above book value. The farm is expected to produce revenue of $2.10 million each year, and annual cash flow from operations equals $2.00 million. The marginal tax rate is 25 percent, and the appropriate discount rate is 9 percent. Calculate the NPV of this investment. (Do not round factor values. Round final answer to 2 decimal places, e.g. 5,275.25.) NPV LA

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