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United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...
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 $155,000, 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 $1.53 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 $510,000. Finally, the project requires an immediate investment in working capital of $405,000. 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 $5.30 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 35%. The cost of capital is 12%.
What is the NPV of Pigpen’s project? (Enter your answer in thousands, not in millions, rounded to the nearest dollar.)
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Expert Solution
| Tax rate | 35% | |||||||||
| Calculation of annual depreciation | ||||||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | Year-7 | Year-8 | Total | |
| Cost | $ 1,530,000 | $ 1,530,000 | $ 1,530,000 | $ 1,530,000 | $ 1,530,000 | $ 1,530,000 | $1,530,000 | $1,530,000 | ||
| Dep Rate (1/10=10%) | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | 10.00% | ||
| Depreciation | Cost * Dep rate | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $1,224,000 |
| Calculation of after-tax salvage value | ||||||||||
| Cost of machine | $ 1,530,000 | |||||||||
| Depreciation | $ 1,224,000 | |||||||||
| WDV | Cost less accumulated depreciation | $ 306,000 | ||||||||
| Sale price | $ 510,000 | |||||||||
| Profit/(Loss) | Sale price less WDV | $ 204,000 | ||||||||
| Tax | Profit/(Loss)*tax rate | $ 71,400 | ||||||||
| Sale price after-tax | Sale price less tax | $ 438,600 | ||||||||
| Calculation of annual operating cash flow | ||||||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | Year-7 | Year-8 | |||
| Sale | $ 5,300,000 | $ 5,565,000 | $ 5,843,250 | $ 6,135,413 | $ 6,442,183 | $ 6,764,292 | $7,102,507 | $7,457,632 | ||
| Less: Operating Cost @ 90% | $ 4,770,000 | $ 5,008,500 | $ 5,258,925 | $ 5,521,871 | $ 5,797,965 | $ 6,087,863 | $6,392,256 | $6,711,869 | ||
| Contribution | $ 530,000 | $ 556,500 | $ 584,325 | $ 613,541 | $ 644,218 | $ 676,429 | $ 710,251 | $ 745,763 | ||
| Less: Rental charge | $ 155,000 | $ 161,200 | $ 167,648 | $ 174,354 | $ 181,328 | $ 188,581 | $ 196,124 | $ 203,969 | ||
| Less: Depreciation | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | ||
| Profit before tax (PBT) | $ 222,000 | $ 242,300 | $ 263,677 | $ 286,187 | $ 309,890 | $ 334,848 | $ 361,126 | $ 388,794 | ||
| Tax@35% | PBT*Tax rate | $ 77,700 | $ 84,805 | $ 92,287 | $ 100,166 | $ 108,462 | $ 117,197 | $ 126,394 | $ 136,078 | |
| Profit After Tax (PAT) | PBT - Tax | $ 144,300 | $ 157,495 | $ 171,390 | $ 186,022 | $ 201,429 | $ 217,651 | $ 234,732 | $ 252,716 | |
| Add Depreciation | PAT + Dep | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | $ 153,000 | |
| Cash Profit after-tax | $ 297,300 | $ 310,495 | $ 324,390 | $ 339,022 | $ 354,429 | $ 370,651 | $ 387,732 | $ 405,716 | ||
| Calculation of working capital movement | ||||||||||
| Working capital-opening | $ - | $ 405,000 | $ 530,000 | $ 556,500 | $ 584,325 | $ 613,541 | $ 644,218 | $ 676,429 | $ 710,251 | |
| Closing working capital | $ 405,000 | $ 530,000 | $ 556,500 | $ 584,325 | $ 613,541 | $ 644,218 | $ 676,429 | $ 710,251 | $ - | |
| Movement | $ 405,000 | $ 125,000 | $ 26,500 | $ 27,825 | $ 29,216 | $ 30,677 | $ 32,211 | $ 33,821 | $ (710,251) | |
 jeff jeffy answered 2 years agoRelated SolutionsUnited Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...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 $160,000, 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 $1.56 million.
This could be depreciated for tax purposes...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...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 for the warehouse is $100,000, and
thereafter the rent is expected to grow in line with inflation at 4
percent per year. In addition to use of the warehouse, the proposal
envisages an investment in plant and equipment of $1.2 million.
This could be depreciated straight-line...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...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 $155,000, 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 $1.53 million.
This could be depreciated for tax purposes...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...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 $190,000, 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 $1.74 million.
This could be depreciated for tax purposes...
United Pigpen is considering a proposal to manufacture high-protein hog feed. The project would make use...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 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
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