The Rodriguez Company is considering an average-risk investment in a mineral wat
ID: 2766949 • Letter: T
Question
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 750 cases of mineral water per year indefinitely. The current sales price is $150 per case, and the current cost per case is $110. The firm is taxed at a rate of 39%. 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 16%. 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. $ ________
THE ANSWER IS NOT $33,000
Explanation / Answer
Sales price = 150
Cost = 110
Net income = 150-110=40
Tax @39% = 40*39% = 15.6
Net income after tax = 40-15.6= 24.4
Total net income after tax = 24.4*750 = 18300
Growth rate = 6% per year
cost of capital is =16%
since spring has indefinite life and will not be depreciated and cash flow will grow by 8% every year its a anuuity with perpecuity hence present value of annuity with perpectuity is:-
=cash flow in next year/(discount rate-growth rate)
=(18300*106%)/(0.16-0.06)
=$193980
Net present value = 193980-150000=$43980
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