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03-PS9-KB - MIT Sloan School of Management J Wang E52-456...

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MIT Sloan School of Management J. Wang 15.407 E52-456 Fall 2003 Problem Set 9: Capital budgeting Due: December 9, 2003 1. (BM) United Pigpen is considering a proposal to manufacture high-protein hog-feed. The project would make use of an existing warehous, which is currently rented out to a neighboring firm. The next year’s rental charge on the warehouse in $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 8 years and to resell the plant and equipment in year 8 for $400,000. Finally, the project requires an initial investment in working capital of $350,000. Thereafter, working capital is forecast to be 10% of sales in each of years 1 through 7. Year sales of hog feed are expected to be $4.2million, and thereafter sales are forecast to grow by 5% a year. Manufacturing costs are expected to be 90% of sales, and profits
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