Nicholas LaCanna (njl3448)
September, 25th, 2025
Problem Set Four
Problem One - Which of the following should be treated as incremental cash flows when deciding
whether to invest in a new manufacturing plant? The site is already owned by the company but existing
buildings would need to be demolished.
a. The market value of the site and existing buildings.
b. Demolitions costs and site clearance.
c. The cost of a new access road put in last year.
d. Lost earnings on other products due to executive time spent on the new facility.
e. A proportion of the cost of leasing the president’s jet airplane.
f. Future depreciation of the new plant.
g. The reduction in the firm’s tax bill resulting from tax depreciation of the new plant.
h. The initial investment in inventories of raw materials.
i. Money already spent on the engineering design of the new plant
Problem Two - 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. This
year’s rental charge on the warehouse is $100,000 and this number is expected to grow at 4% per year. In
addition to using the warehouse the proposal envisages an investment in plant and equipment of $1.2
million. Depreciation is $120,000 per year. Pigpen expects to terminate the project after eight years and to
resell the plant and equipment then (i.e., in t=8) for $400,000. The project requires an initial (t=0)
investment in working capital of $350,000. Thereafter, working capital is forecasted to be 10% of sales in
each of years 1 through 7. This year’s sales of hog feed are expected to be $4.2 million and thereafter
sales are forecasted to grow by 5% per year. Manufacturing costs are expected to be 90% of sales. The
corporate tax rate is 35% and the cost of capital is 12%. What is the NPV of Pigpen’s project?
1. Warehouse - 100,000(1.04)/1.12 + 100,000(1.04)/1.122 + 100,000(1.08)/1.123 +
100,000(1.12)/1.124 + 100,000(1.16)/1.125 + 100,000(1.20)/1.126 + 100,000(1.24)/1.127 +
100,000(1.28)/1.128 = -$577,214
2. Investment = -$1,200,000
3. Depreciation = 120,000 + 120,000/1.123 + 120,000/1.124 + 120,000/1.125 + 120,000/1.126 +
120,000/1.127 + 120,000/1.128 = $513,311 x 0.35 = $179,659
4. Resell = 400,000(0.65)/1.128 = 105,009
5. Working Capital = - $350,000 - 91,000/1.121 -22,000/1.122 -23,153/1.123 -24,310/1.124
-25,525/1.125, -26,802/1.126, -28,142/1.127 -29,549/1.128 = -$533,455
6. Sales = (4,200,00(1.05)/1.12 + 4,200,00(1.10)/1.122 + 4,200,00(1.15)/1.123 +
4,200,00(1.20)/1.124 + 4,200,00(1.25)/1.125 + 4,200,00(1.30)/1.126 + 4,200,00(1.30)/1.127 +
4,200,00(1.35)/1.128)10% = $2,475,162 x 0.65 = $1,608.855
NPV = –$417,000
USX is considering adding an additional furnace that will operate for ten years. Last year the
company commissioned a feasibility study that cost $1 million. The study came up with the
following numbers. The new furnace costs $1,000 million and has a salvage value of $200 million
at the end of the ten-year period. Using the new furnace increases sales by $150 million per year
and involves operating expenses of $10 million per year. Moreover, working capital requirements
increase by $20 million immediately. According to IRS rules the new furnace must be depreciated
straight line over eight years. The new furnace will need parts from an old furnace USX already
owns. The old furnace is fully depreciated and has a resale value (after-tax) of $30 million.
Without the parts, which are no longer manufactured, the old furnace has no resale value. The
corporate tax rate is 35% and the cost of capital is 10%. Should USX
go ahead with the new furnac
1.Study → Sunk Cost Ignore
2.New Furance → -$1,000,000,000
3.Salvage → (200,000,000 + 20,000,000)/1.110 = 84,800,000
4.Working Cap → -$20,000,000
5.Old Furance → -$30,000,000
6.Sales → 150/1.101 + 150/1.102 + 150/1.103 + 150/1.104 + 150/1.105 + 150/1.106 +
150/1.107 + 150/1.108 + 150/1.109 + 150/1.1010 = $921,900,000
7. 100/1.101 + 100/1.102 + 100/1.103 + 100/1.104 + 100/1.105 + 100/1.106 + 150/1.107 +
100/1.108 = 195,350,000
NPV = $152,050,000
