United Pigpen (UP) 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 $100,000, 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 $1.2 million. This could be depreciated for tax purposes over 10 years. However, UP expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in working capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years I through 7. Year 1 sales of hog feed are expected to be $4.2 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
United Pigpen (UP) 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 $100,000, 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 $1.2 million. This could be depreciated for tax purposes over 10 years. However, UP expects to terminate the project at the end of eight years and to resell the plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in working capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in each of years I through 7. Year 1 sales of hog feed are expected to be $4.2 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
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
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Transcribed Image Text:United Pigpen (UP) 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 $100,000, 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 $1.2 million. This could be depreciated for tax purposes over
10 years. However, UP expects to terminate the project at the end of eight years and to resell the
plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in
working capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in each of
years I through 7.
Year 1 sales of hog feed are expected to be $4.2 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%. The cost of capital is 12%. What is the NV of UP's
project?
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