Would this make the project better or worse

Reference no: EM131525166

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 1,000 cases of mineral water per year indefinitely. The current sales price is $138 per case, and the current cost per case (all variable) is $105. The firm is taxed at a rate of 34 percent. Both prices and costs are expected to rise at a rate of 6 percent per year. The firm uses only equity, and it has a cost of capital of 15 percent. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated. a. Should the firm accept the project? (Hint: The project is a perpetuity, so you must use the formula for a perpetuity to find its NPV.) b. If total costs consisted of a fixed cost of $10,000 per year and variable costs of $95 per unit, and if only the variable costs were 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.

Reference no: EM131525166

Questions Cloud

How is this related to subculture perspective explain : Do you think James learned his behavior from his father? Explain your reasoning. How is this related to subculture perspective? Explain

Determine the net present value of the stream of profits : Determine the net present value of the stream of profits, i.e., discounted profits in year 1, year 2, year 3 less the cost of the deal.

What is the net cost of the spectrometer : You have been asked by the president of your company to evaluate the proposed acquisition of a new spectrometer for the firm's R&D department.

Create the amortization schedule for loan : Create the amortization schedule for a loan of $10,000, paid monthly over three years using a 10 percent APR.

Would this make the project better or worse : The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000.

Disputes among co-workers or dissatisfied employees : Whether conflicts arise from disputes among co-workers or dissatisfied employees who believe they have not been treated fairly, maintaining positive employee.

What the individual responsibilities in courtroom process : What are the individual's responsibilities in the courtroom process? Why is it important for these responsibilities to be fulfilled adequately

Vignettedescribing the ethical issues in the scenario : Write at least a one page analysis of each vignettedescribing the ethical issues in the scenario, citing the standard numbers.

Pool of managerial talent : Organizations need to have a pool of managerial talent to take on jobs from senior managers and new management jobs that may be created.

User Account

All Pages