Prof.

Paulo Fraletti VALUATION ASSIGNMENT September 5th, 2022

Insper Advanced Topics in Corporate Finance

Student name: Philip Emil Nørregaard Habersaat

 Write your name on the above line. Treat this as an individual, closed-book, closed-notes test.

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 neighbouring
firm. Next year’s rental charge on the warehouse is $200,000, 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 million. This could be fully depreciated, for tax purposes, straight-line over 5
years. However, Pigpen expects to terminate the project at the end of 4 years and to resell the
plant and equipment in year 4 for $400,000.
Finally, the project requires an initial (t=0) investment in working capital of $500,000.
Thereafter, working capital is forecasted to be 10% of sales in each of years 1 through 3.
Year 1 sales of hog feed are expected to be $6 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 30%. Estimate United Pigpen’s project
yearly Net Cash Flows (the bottom line).
Figures in 000's
Year 0 1 2 3 4
Sales (5% Gowth a year) 6000 6300 6615 6945,75
Manufactoring cost (90% of sales) 5400 5670 5953,5 6251,18
Depreciation (investement / 5) 200 200 200 200
Rent (4% Growth a year) 200 208 216,32 224,97
Earnings before taxes 200 222 245,18 269,60
Taxes (30%) 60 66,6 73,55 80,88
CF - operations 340 355,4 371,63 388,72
WC (10% of Sales from year 1-3) 500 600 630 661,5 0
Investment in WC 500 100 30 31,5 -661,5
Investment plant-equiptmt 1000
Sale of Plant 400
Tax on sale 120
NCF -1500 240 325,4 340,13 1330,22