Reference no: EM131452471

Jericho Farms is considering a proposal to manufacture a high-protein hog feed. Year 1 sales of hog feed are expected to be $6.0m and thereafter sales are forecasted to grow by 3% a year. Manufacturing costs are expected to be 80% of sales. The project would make use of an existing warehouse which Jericho Farms owns and is currently rented out to a neighboring firm. The next year's rental charge on the warehouse is $190,000, and thereafter the rent is expected to grow at 3% per year. If Jericho Farms manufactures the hog feed, it will not be able to rent out the warehouse to the neighboring farm once the project starts. In addition, to using the warehouse, the proposal envisages an investment in plant and equipment of $2.25m. This could be depreciated for tax purposes straight line over 10 years. However, Jericho Farms expects to terminate the project at the end of eight years, and to resell the plant and equipment in year 8 for $740,000. Finally the project requires an initial investment in working capital of $510,000. Thereafter working capital is forecasted to be 10% of sales in each of the years 1 through 7 and fully recovered right before the sale of the plant in year 8. Profits are subject to tax at 35%. The cost of capital is 11%.

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What is the IRR of Jericho Farms’ Project?