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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