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Problem 11-8 Inflation Adjustments The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost...
Problem 11-8 Inflation Adjustments
The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000. The project will produce 800 cases of mineral water per year indefinitely. The current sales price is $136 per case, and the current cost per case is $99. The firm is taxed at a rate of 40%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.
- What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. (Hint:The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)
Please show your work
