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 $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 investment in plant and equipment of $1.56 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 $520,000. Finally, the project requires an immediate investment in working capital of $410,000. Thereafter, working capital is forecasted to be 10% of sales 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 $5.40 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 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 $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 investment in plant and equipment of $1.56 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 $520,000. Finally, the project requires an immediate investment in working capital of $410,000. Thereafter, working capital is forecasted to be 10% of sales 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 $5.40 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 thousand
Financial And Managerial Accounting
15th Edition
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:WARREN, Carl S.
Chapter26: Capital Investment Analysis
Section: Chapter Questions
Problem 5MAD: Home Garden Inc. is considering the construction of a distribution warehouse in West Virginia to...
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Transcribed Image Text: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 $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 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 $520,000. Finally, the
project requires an immediate investment in working capital of $410,000. 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 $5.40 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
thousand
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