Question

United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

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 $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. 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 $4.40 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 25%. The cost of capital is 12%.

What is the NPV of Pigpen’s project? (Do not round intermediate calculations. Enter your answer in dollars not in millions, rounded to the nearest whole dollars.)

NPV=??

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Solution

Calculation of the NPV of Pigpen’s project is as under:

Year 0 1 2 3 4 5 6 7 8
Sales        4,400,000.00        4,620,000.00        4,851,000.00        5,093,550.00        5,348,227.50        5,615,638.88        5,896,420.82        6,191,241.86
Manufacturing Cost      (3,960,000.00)      (4,158,000.00)      (4,365,900.00)      (4,584,195.00)      (4,813,404.75)      (5,054,074.99)      (5,306,778.74)      (5,572,117.67)
Warehour Rental Income         (110,000.00)         (114,400.00)         (118,976.00)         (123,735.04)         (128,684.44)         (133,831.82)         (139,185.09)         (144,752.50)
Depreciation         (126,000.00)         (126,000.00)         (126,000.00)         (126,000.00)         (126,000.00)         (126,000.00)         (126,000.00)         (126,000.00)
Profit Before Tax            204,000.00            221,600.00            240,124.00            259,619.96            280,138.31            301,732.07            324,456.99            348,371.69
Tax            (51,000.00)            (55,400.00)            (60,031.00)            (64,904.99)            (70,034.58)            (75,433.02)            (81,114.25)            (87,092.92)
Profit After Tax            153,000.00            166,200.00            180,093.00            194,714.97            210,103.73            226,299.05            243,342.74            261,278.77
Depreciation            126,000.00            126,000.00            126,000.00            126,000.00            126,000.00            126,000.00            126,000.00            126,000.00
Cash flow after tax            279,000.00            292,200.00            306,093.00            320,714.97            336,103.73            352,299.05            369,342.74            387,278.77
Initial Invetment         (1,260,000.00)
Working Capital (Note 1)             (360,000.00)              (5,000.00)            (22,000.00)            (23,100.00)            (24,255.00)            (25,467.75)            (26,741.14)            (28,078.19)           
Release of Working Capital 589,642.08
Resell Value            420,000.00
Total Cash Flows         (1,620,000.00)            274,000.00            270,200.00            282,993.00            296,459.97            310,635.98            325,557.91            341,264.55        1,396,920.85
Cost of Capital 12%
NPV` =NPV(rate, value1,value2,value3..)
NPV $258,610.50

Hence, the NPV of Pigpen’s project is $ 258610.50

Note 1: Calculation of Working Capital Requirement

Year 0 1 2 3 4 5 6 7 8
Sales        4,400,000.00        4,620,000.00        4,851,000.00        5,093,550.00        5,348,227.50        5,615,638.88        5,896,420.82        6,191,241.86
Working Capital to be 10% of sales               435,000.00            440,000.00            462,000.00            485,100.00            509,355.00            534,822.75            561,563.89            589,642.08 0
Additional Working Capital requirement                5,000.00              22,000.00              23,100.00              24,255.00              25,467.75              26,741.14              28,078.19         (589,642.08)
Add a comment
Know the answer?
Add Answer to:
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $140,000, 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 $1.44 million. This could be depreciated for tax purposes...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $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...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $145,000, 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 $1.47 million. This could be depreciated for tax purposes...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existi...

    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 $200,000, 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 $1.80 million. This could be depreciated for tax purposes...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use of an existi...

    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 $130,000, 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 $1.38 million. This could be depreciated for tax purposes...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $165,000, 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 $1.59 million. This could be depreciated for tax purposes...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $185,000, 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 $1.71 million. This could be depreciated for...

  • United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would require use...

    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 $115,000, 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 $1.29 million. This could be depreciated for tax purposes...

  • Project NPV United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would...

    Project NPV 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 $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...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT