4 United Pigpen (UP) is considering a proposal to manufacture high-protein hog feed. The projectwould make use of an existing warehouse, which is currently rented out to a neighboring firm. Thenext year's rental charge on the warehouse is $100,000, and thereafter the rent is expected to growin line with inflation at 4% a year. In addition to using the warehouse, the proposal envisages aninvestment in plant and equipment of $1.2 million. This could be depreciated for tax purposes over10 years. However, UP expects to terminate the project at the end of eight years and to resell theplant and equipment in year 8 for $400,000. Finally, the project requires an initial investment inworking capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in each ofyears I through 7.Year 1 sales of hog feed are expected to be $4.2 million, and thereafter sales are forecasted to growby 5% a year, slightly faster than the inflation rate. Manufacturing costs are expected to be 90% ofsales, and profits are subject to tax at 25%. The cost of capital is 12%. What is the NV of UP'sproject?

Sales in year 1 = $4,200,000Sales growth rate = 5%Initial investment = $1,200,000Rental cost =…

Answered: United Pigpen (UP) is considering a…

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 1lM

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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 $195,000, 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 $1.77 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 $590,000. Finally, the project requires an immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…
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 $195,000, 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 $1.77 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 $590,000. Finally, the project requires an immediate investment in working capital of $445,000. Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 7. Year 1 sales of hog feed are expected to be $6.10 million, and thereafter, sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing costs…

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