Using NPV, evaluate an investment in a hog farrow-to-finish enterprise. The syst
ID: 2567020 • Letter: U
Question
Using NPV, evaluate an investment in a hog farrow-to-finish enterprise. The system has a capacity of 280 litters per year with 140 sows farrowing every six months. The litters can be sold for $455 each at a cost of $380. Assume a cash purchase of the buildings, equipment, and livestock using the investor’s equity capital. Given the above and following information, fill out the following table with your calculations.
Initial Investment
$100,000 Buildings
$ 40,000 Equipment $ 10,080 Livestock
The breeding livestock fall in the three-year class for tax depreciation purposes while the buildings and equipment are in the eight-year class. Depreciation is calculated using straight line depreciation methods and assuming no salvage value. The government has offered an incentive to encourage investment in buildings and equipment. Depreciation on buildings and equipment can be accelerated to 12 their typical useful life.
Planning Horizon
The investor uses a 10-year planning horizon.
Terminal Value
The terminal value in year 10 is projected to be $30,000 and is fully taxable.
Required rate-of-return
The investor stipulates a required rate-of-return of 9 percent.
Net Cash Flows
Net cash flows to the investor are determined by deducting projected operating expenses and income tax obligations from projected operating receipts in each year of the planning period.
Remember that depreciation is a NONCASH expense that is used for calculating income taxes only.
The initial investment is a negative cash outflow at present.
The terminal value is considered part of the cash flow in the final period.
In response to inflation, both the operating receipts and expenses are projected to increase at 3 percent per year. For simplicity, an income tax rate of 20 percent is assumed.
Part A: Investment Data
Discount Rate
3-Year property 8-year property Terminal Value Growth Rate in Receipts & Expenses Income Tax Rate Number of Litters Gross Income/Litter Direct Cost/LitterDiscount Rate
Part B: Net Cash FlowsExplanation / Answer
Part A: Investment Data Depn Year Depn 3-Year property 10,080 3 3,360 8-year property 1,40,000 4=8/2 35,000 Terminal Value 30,000 Growth Rate in Receipts & Expenses 3% Income Tax Rate 20% Number of Litters 280 Gross Income/Litter 75 Sales Price/Litre 455 Direct Cost/Litter 380 Discount Rate 9% Part B: Net Cash Flows Item Year Net Present Value 0 1 2 3 4 5 6 7 8 9 10 Operating Receipts 1,27,400 1,31,222 1,35,159 1,39,213 1,43,390 1,47,692 1,52,122 1,56,686 1,61,387 1,66,228 Terminal Value 30,000 Total Cash Inflow 1,27,400 1,31,222 1,35,159 1,39,213 1,43,390 1,47,692 1,52,122 1,56,686 1,61,387 1,96,228 Initial Outlay 1,50,080 Operating Expenses 1,06,400 1,09,592 1,12,880 1,16,266 1,19,754 1,23,347 1,27,047 1,30,859 1,34,784 1,38,828 Depreciation 38,360 38,360 38,360 35,000 Taxable Income (17,360) (16,730) (16,081) (12,053) 23,636 24,345 25,075 25,827 26,602 57,400 Income Taxes (3,472) (3,346) (3,216) (2,411) 4,727 4,869 5,015 5,165 5,320 11,480 Total Cash Outflow 1,50,080 1,02,928 1,06,246 1,09,664 1,13,856 1,24,481 1,28,216 1,32,062 1,36,024 1,40,105 1,50,308 Net Cash Flow (1,50,080) 24,472 24,976 25,495 25,358 18,909 19,476 20,060 20,662 21,282 45,920 Discount Factor1/(1+.09)^n 1 0.917431193 0.84167999 0.7721835 0.7084252 0.6499314 0.5962673 0.5470342 0.5018663 0.4604278 0.4224108 Present Value (1,50,080) 22,451 21,022 19,687 17,964 12,289 11,613 10,974 10,370 9,799 19,397 5,485 Since NPV>0, i.e. 5,485 project can be accepted
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