Question

Petaluma Chicken, Inc. is considering a new organic chicken farm to service it's western regional stores and has hired you as a consultant to make a recommendation. The stores currently require 500,000 birds per year and they are purchased from various local chicken farms for an average price of $3 per bird. The managers believe that their new organic farm would raise the cost per bird to $4, while raising the average selling price to $8.50 per bird from $6.50 per bird now. However, due to the centralized structure of the is operation, shipping expenses will likely decrease from $1.00 per bird to $0.75. The firm feels it will need to increase its inventory of live birds by $15,000, and it will cost $150,000 to purchase the land, and $300,000 to construct the buildings and purchase equipment. In addition, labor expense is expected to rise by $130,000 per year.

The buildings and equipment will be depreciated using the straight-line method over five years to a salvage value of $100,000. After five years, the company will sell the farm for $300,000 (Base case estimate is $100,000 for the buildings and equipment and $200,000 for the land). The firms tax rate is 35% and be sure you remember that land is not depreciable.

Given that, construct a spread sheet that calculates the initial outlay, after tax cash flows, and terminal cash flow for the project. The company’s cost of capital is 11%, find NPV and IRR. Using that, decide if this is a go or no go project. Then do any other analysis you think might be useful to the CEO. When complete, construct a memo that will inform the CEO of your findings and your suggested course of action.

Next week, three different market scenarios will be added. You will learn how to conduct the what-if” or scenario analysis in that week.

**NEED SPECIFIC HELP WITH TERMINAL CASH FLOW**

Cash Flow
Initial Outlay	$    465,000.00	Cost of land, buildings and increase in inventory
Annual After-tax Cash Flow	$    387,750.00	Turkeys per year times additional profit minus labor + depreciation.
Then multiply by 1-tax rate to get after tax net income then add back depreciation as it's not cash
Terminal Cash Flow	$    297,500.00	Sell off land, buildings and inventory while accounting for taxes
Land cost	$    150,000.00	So actual salvage value building minus any taxes due on the difference of the actual salvage value and the depreciated salvage value.
Land Salvage Value	$    200,000.00	Plus the actual salvage value on the land minus any taxes due on the difference of the actual salvage value and the land cost
Tax	$      17,500.00	Plus selling off the increased inventory (sold at same price as bought)
Gain on Sale
Building Salvage Value	$    100,000.00
Depreciation Building
Tax	$                   -
Gain on Sale	$                   -
Salvage Value Inventory	$      15,000.00
Period	Cash Flow	Initial outlay from above
0	$ (465,000.00)	After tax CF from above
1	$    387,750.00	After tax CF from above
2	$    387,750.00	After tax CF from above
3	$    387,750.00	After tax CF from above
4	$    387,750.00	After tax CF from above
5	$    685,250.00	After tax CF from above plus the terminal cash flow from above

Answer 1

Answer:

AS SPECIFIC HELP WITH TERMINAL CASH FLOW is required, same is given below:

Terminal cash flow:

1. Salvage value of land = $200,000

Cost of land = $150,000

Tax on gain = 35%* ($200,000 - $150,000) = $17,500

Hence, salvage value net of Tax = $200,000 - $17,500 = $182,500

2. Salvage value of Building and equipment = $100,000

Salvage value = Book value, hence no tax impact

3. Release of working capital for inventory = $15,000

Terminal cash flow = $182,500 + $100,000 + $15,000 = $297,500

Terminal cash flow = $297,500