Check My Work 3-9: Problem 13-8 The Rodriguez Company is considering an averege-
ID: 2792571 • Letter: C
Question
Check My Work 3-9: Problem 13-8 The Rodriguez Company is considering an averege-risk investment in water per year rise at a rate of 6% per year. The firm uses only equity, and it has a cost of indefinite life and will not be depreciated. The current water spring project that has a cost of $155,000. The project will produce 1,100 cases of mineral capital of 16%. Assume that cash nows prices and costs are expected to consist only of after-tax profits, because the spring has an a. What is the NPV of the project? Do not round intermediate steps. Round your answer to the nearest hundred dollars. ts NPV.) (Hint: The project is a growing perpetulity, so you must use Should the firm accept the project? b. Suppose that total costs consisted of a foxed cost of s9,500 per year plus veriable costs of $100 per unit, and suppose that only the variable costs ware expected to increase with inflation. Would this make the project better or worse? Continue with the assumption that the sales price will rise with inflation. This will make the projectExplanation / Answer
(a)Here we have to calculate the present value of a growing perptuity
Year 1 Cash flow Calculation:
Gross Profit = 149 *1100 - 114*1100 = 38,500.
After tax cash flow = 38,500*(1-Tax rate) = 38,500*(1-0.38) = 23,870
Present Value of this growing perpetuity = Cash flow in year 1/ (r- g) where r = 0.16 and g = 0.06
Present Value of this growing perpetuity = 23,870/(0.16-0.06) = 238,700
Net Present Value (NPV) = 238,700 - Inital cost = 238,700 -155,000 = 83,700
NPV = $83,700
Yes, the firm should accept the project
(b) This will make the project better