question archive Chicago Turkey is considering a new turkey farm to service its western region stores
Chicago Turkey is considering a new turkey farm to service its western region stores
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Chicago Turkey is considering a new turkey farm to service its western region stores. The stores currently require 650,000 turkeys per year, and they are purchased from various local turkey farms for an average price of $8 per bird. The managers believe that their new farm would lower the cost per bird to $7, while maintaining the average selling price of $12 per bird. However, due to the centralized structure of this operation, shipping expenses will increase to $1.25 per bird from the current $1.00. The firm will need to increase its inventory of live turkeys by $45,000. It will cost $200,000 to purchase the land and $350,000 to construct the buildings and purchase equipment. In addition, labor expense will rise by $250,000 per year. The buildings and equipment will be depreciated using the straight-line method over five years to a salvage value of $100,000. After five years, the company will sell the farm for $300,000 ($100,000 for the buildings and equipment, $200,000 for the land). The firm's marginal tax rate is 25%. Note that land is not depreciable.
- Calculate the initial outlay, after-tax cash flows, and terminal cash flow for this project.
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a) Initial outlay
This will include the initial investments(costs) for the new turkey firm.
Initial outlay = Increase in Inventory +Cost of Land + Cost of Constructing Building and purchasing Equipment
=$45,000 +$200,000 + $350,000
=$595,000
Costs to be incurred = $595,000
Initial outlay = $595,000
b)After tax cashflows
First we compare the prices of the current and new firm to get the additional profit which will enable us get the after tax cashflows.
Depreciation = (Cost - Salvage value)/useful life
Note that we are only depreciating the building and equipment
Please see the attached file for the complete solution
