Question

In: Accounting

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?

Solutions

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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