1. A new hog investment requires an initial outlay of $130,000 and is expected to increase...

1. A new hog investment requires an initial outlay of $130,000 and is expected to increase operating receipts by 87,000 but will also increase operating expenses by 23,000. The investment will be depreciated over 15 years and will have a $0 salvage value. The marginal tax rate is 30%. The investment will be analyzed over 7 years and the terminal value of the hog investment after 7 years will be $45,000. The pre-tax discount rate is 13.5%. What is the NPV?

Based on the previous question, what is the IRR?

Based on your previous answers, would you invest in this project? Why or why not?

Expert Solution

New hog investment
NPV	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Total	Calculation of straight line depreciation
Investment	(130,000.00)	-	-	-	-	-	-	-	(130,000.00)
Operating Expenses		(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(161,000.00)	Purchase cost	130,000.00
Depreciation		(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(130,000.00)	Life (Years)	7.00
Savings in costs		87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	609,000.00	Annual Depreciation	18,571.43
Net Savings		45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	318,000.00
Tax @ 30%		13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	95,400.00
Savings after tax		31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	222,600.00
Add: Depreciation		18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	130,000.00
Add: Salvage Value		-	-	-	-	-	-	45,000.00	45,000.00
Net Cash flows	(130,000.00)	50,371.43	50,371.43	50,371.43	50,371.43	50,371.43	50,371.43	95,371.43	267,600.00
PV factor @ 13.5%	1.00	0.881	0.776	0.684	0.603	0.531	0.468	0.412
PV of cash flows	(130,000.00)	44,380.11	39,101.42	34,450.59	30,352.94	26,742.68	23,561.83	39,304.95	107,894.54
Net present value (NPV) is $ 107,894.54

IRR	Y0	Y1	Y2	Y3	Y4	Y5	Y6	Y7	Total
Investment	(130,000.00)	-	-	-	-	-	-	-	(130,000.00)
Operating Expenses		(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(23,000.00)	(161,000.00)
Depreciation		(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(18,571.43)	(130,000.00)
Savings in costs		87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	87,000.00	609,000.00
Net Savings		45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	45,428.57	318,000.00
Tax @ 30%		13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	13,628.57	95,400.00
Savings after tax		31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	31,800.00	222,600.00
Add: Depreciation		18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	18,571.43	130,000.00
Add: Salvage Value		-	-	-	-	-	-	45,000.00	45,000.00
Net Cash flows	(130,000.00)	50,371.43	50,371.43	50,371.43	50,371.43	50,371.43	50,371.43	95,371.43	267,600.00
PV factor @ 35%	1.00	0.741	0.549	0.406	0.301	0.223	0.165	0.122
PV of cash flows	(130,000.00)	37,312.17	27,638.64	20,473.07	15,165.24	11,233.51	8,321.12	11,670.30	1,814.04
IRR is 35%

As NPV is positive so you should invest in this project.

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