Solution:
Calculation of NPV
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Sales | 5,900,000.00 | 6,195,000.00 | 6,504,750.00 | 6,829,987.50 | 7,171,486.88 | 7,530,061.22 | 7,906,564.28 | 8,301,892.49 | |
Manufacturing Cost | (5,310,000.00) | (5,575,500.00) | (5,854,275.00) | (6,146,988.75) | (6,454,338.19) | (6,777,055.10) | (7,115,907.85) | (7,471,703.24) | |
Warehour Rental Income | (185,000.00) | (192,400.00) | (200,096.00) | (208,099.84) | (216,423.83) | (225,080.79) | (234,084.02) | (243,447.38) | |
Depreciation | (171,000.00) | (171,000.00) | (171,000.00) | (171,000.00) | (171,000.00) | (171,000.00) | (171,000.00) | (171,000.00) | |
Profit Before Tax | 234,000.00 | 256,100.00 | 279,379.00 | 303,898.91 | 329,724.85 | 356,925.33 | 385,572.41 | 415,741.87 | |
Tax | (58,500.00) | (64,025.00) | (69,844.75) | (75,974.73) | (82,431.21) | (89,231.33) | (96,393.10) | (103,935.47) | |
Profit After Tax | 175,500.00 | 192,075.00 | 209,534.25 | 227,924.18 | 247,293.64 | 267,694.00 | 289,179.31 | 311,806.40 | |
Depreciation | 171,000.00 | 171,000.00 | 171,000.00 | 171,000.00 | 171,000.00 | 171,000.00 | 171,000.00 | 171,000.00 | |
Cash flow after tax | 346,500.00 | 363,075.00 | 380,534.25 | 398,924.18 | 418,293.64 | 438,694.00 | 460,179.31 | 482,806.40 | |
Initial Invetment | (1,710,000.00) | ||||||||
Working Capital Requirement (Note 1) | (435,000.00) | (155,000.00) | (29,500.00) | (30,975.00) | (32,523.75) | (34,149.94) | (35,857.43) | (37,650.31) | 0.00 |
Release of Working Capital | 790,656.43 | ||||||||
Resell Value | 570,000.00 | ||||||||
Total Cash Flows | (2,145,000.00) | 191,500.00 | 333,575.00 | 349,559.25 | 366,400.43 | 384,143.70 | 402,836.57 | 422,529.00 | 1,843,462.83 |
Cost of Capital | 12% | ||||||||
NPV | =NPV(rate,value1value2,..) | ||||||||
NPV | $117,238.33 |
Hence, the NPV is $ 117238.33
Note 1: Calculation of working capital requirement
Year | Initial | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Sales | 5,900,000.00 | 6,195,000.00 | 6,504,750.00 | 6,829,987.50 | 7,171,486.88 | 7,530,061.22 | 7,906,564.28 | 8,301,892.49 | |
Working Capital to be 10% of sales | 435,000.00 | 590,000.00 | 619,500.00 | 650,475.00 | 682,998.75 | 717,148.69 | 753,006.12 | 790,656.43 | 0 |
Additional Working Capital requirement | 155,000.00 | 29,500.00 | 30,975.00 | 32,523.75 | 34,149.94 | 35,857.43 | 37,650.31 | (790,656.43) |
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 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 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 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 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 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 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...
URGENTT 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 $170,000, 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 $1.62 million. This could be depreciated for tax...
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 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...