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 $185,000, 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 $1.71 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 $570,000. Finally, the project requires an immediate Investment in working capital of $435,000. Thereafter, working capital is forecasted to be 10% of sales In each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $5.90 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 21%. The cost of capital is 12%. What Is the NPV of Pigpen's project? Note: Enter your answer in thousands, not in millions, rounded to the nearest dollar. NPV $ 686,544 thousand
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 $185,000, 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 $1.71 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 $570,000. Finally, the project requires an immediate Investment in working capital of $435,000. Thereafter, working capital is forecasted to be 10% of sales In each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed are expected to be $5.90 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 21%. The cost of capital is 12%. What Is the NPV of Pigpen's project? Note: Enter your answer in thousands, not in millions, rounded to the nearest dollar. NPV $ 686,544 thousand
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 9-19 Project Evaluation (LO2, LO3)
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 $185,000, 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 $1.71 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 $570,000. Finally, the
project requires an immediate Investment in working capital of $435,000. Thereafter, working capital is forecasted to be 10% of sales
In each of years 1 through 7. Working capital will be run down to zero in year 8 when the project shuts down. Year 1 sales of hog feed
are expected to be $5.90 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 21%. The cost of capital is 12%.
What is the NPV of Pigpen's project?
Note: Enter your answer in thousands, not in millions, rounded to the nearest dollar.
NPV
$
686,544 thousand
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