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