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 $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 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 $580,000. Finally, the project requires an immediate investment in working capital of $440,000. 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 $6.00 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

Formulas used

Depriciation=(B3-B4)/B5
Present value of rent=PV(1.12/1.04-1,8,155000)

Operating profit=C10-C11-C12

Profit after tax=C13*0.65
Operating Cashflow=C14+C12

Working capital required=C10*10%
Increase in Working capital=C16-B17

total Cashflow(t=0)=B7-B3-B17
total Cashflow(t=1) =C15-C17

Total Cashflow (t=8)=J15-J17+B4

NPV=NPV(0.12,C18:J18)+B18

I hope my efforts will be fruitful to you...?