Reference no: EM132070496

Petaluma Chicken, Inc. is considering a new organic chicken farm to service it's western regional stores and has hired you as a consultant to make a recommendation. The stores currently require 500,000 birds per year and they are purchased from various local chicken farms for an average price of $3 per bird.

The managers believe that their new organic farm would raise the cost per bird to $4, while raising the average selling price to $8.50 per bird from $6.50 per bird now. However, due to the centralized structure of the is operation, shipping expenses will likely decrease from $1.00 per bird to $0.75. The firm feels it will need to increase its inventory of live birds by $15,000, and it will cost $150,000 to purchase the land, and $300,000 to construct the buildings and purchase equipment. In addition, labor expense is expected to rise by $130,000 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 (Base case estimate is $100,000 for the buildings and equipment and $200,000 for the land). The firms marginal tax rate is 35% and average tax rate is 28%, and be sure you remember that land is not depreciable.

QUESTION: Given that, construct a spread sheet that calculates the initial outlay, after tax cash flows, and terminal cash flow for the project. Then find NPV (use 5% discount rate) and IRR. Using that, decide if this is a go or no go project. Then do any other analysis you think might be useful to the CEO.