Riverlea
Swine is considering a proposal to manufacture high-protein pig feed.The project would make

use
of an existing warehouse, which is currently rented out to a neighbouring
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 percent 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, Riverlea Swine expects

to
terminate the project at the end of eight 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.

Year
1 sales of pig feed are expected to be $4.2 million, and thereafter sales are
forecast to grow by

5
percent a year, slightly faster than the inflation rate.Manufacturing costs are expected to be 90
percent of

sales,
and projects are subject to tax at 30 percent.The cost of capital is 12 percent