Question

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.)

Answer 1

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 Next > < Previous Related Solutions 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 $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 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 company spent $20,000 to... United Pigpen is considering a proposal to manufacture high-protein hog feed. The company spent $20,000 to do market research on potential products. 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 $100,000 (after taxt), 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... Arnold Inc. is considering a proposal to manufacture​ high-end protein bars used as food supplements by... Arnold Inc. is considering a proposal to manufacture​ high-end protein bars used as food supplements by body builders. The project requires use of an existing​ warehouse, which the firm acquired three years ago for $2 million and which it currently rents out for $101,000. Rental rates are not expected to change going forward. In addition to using the​ warehouse, the project requires an upfront investment into machines and other equipment of $1.5 million. This investment can be fully depreciated​ straight-line... Arnold Inc. is considering a proposal to manufacture​ high-end protein bars used as food supplements by... Arnold Inc. is considering a proposal to manufacture​ high-end protein bars used as food supplements by body builders. The project requires use of an existing​ warehouse, which the firm acquired three years ago for $ 2 million and which it currently rents out for $ 102,000. Rental rates are not expected to change going forward. In addition to using the​ warehouse, the project requires an upfront investment into machines and other equipment of $ 1.2 million. This investment can be... Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by... Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $1 million and which it currently rents out for $120,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an up-front investment into machines and other equipment of $1.4m. This investment can be fully depreciated straight-line over... ADVERTISEMENT Subjects Accounting Advanced Math Anatomy and Physiology Biology Chemistry Civil Engineering Computer Science Economics Electrical Engineering Finance History Math Mechanical Engineering Operations Management Physics Psychology Statistics and Probability Nursing Other ADVERTISEMENT Latest Questions MARGI sells different types of wine. Customers place orders to the most popular “Summer Wine” at... Java. If possible please put explanations for each line of code. Write a test program that... . Use the following information to calculate your company's expected return State Probability Return Boom 20%... You are considering the following two projects and can only take one. Your cost of capital... C++: Write a program that produces truth tables for the following compound propositions. Write the header... 1. What is the historical role of investment bankers ? Has this role changed ? Why... How were the original Internet requirements met through its design? What are the two main requirements... ADVERTISEMENT About @ 2020 WizEdu