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NPV of Pigpen's project

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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 straight line over 10 years. However, Pigpen expects to terminate the project at the end of eight years to resell the plant and equipment in year 8 for $400,000. Finally the project requires and initial investment in working capital of $350,000. 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 4.2 million and thereafter sales are forecasted to grow by 5% a year, slightly faster than the inflation rate. Manufacturing cost 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? (You can use excel l to calculate your answer)

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Solution Summary

Step by step calculation showing net present value of Pigpen's project.

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  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
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