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Inflation Adjustments The Rodriguez Company is considering an average-risk investmentin a

Inflation Adjustments The Rodriguez Company is considering an average-risk investmentin a

Inflation Adjustments

The Rodriguez Company is considering an average-risk investmentin a mineral water spring project that has a cost of $130,000. Theproject will produce 800 cases of mineral water per yearindefinitely. The current sales price is $143 per case, and thecurrent cost per case is $110. The firm is taxed at a rate of 36%.Both prices and costs are expected to rise at a rate of 7% peryear. The firm uses only equity, and it has a cost of capital of14%. Assume that cash flows consist only of after-tax profits,since the spring has an indefinite life and will not bedepreciated.

a. What is the NPV of the project? Do not round intermediatesteps. Round your answer to the nearest hundred dollars. (Hint: Theproject is a growing perpetuity, so you must use the constantgrowth formula to find its NPV.)

Abhinav 04-Dec-2019

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