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2 Finance questions

Inflation Adjustments

1.The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $170,000. The project will produce 1,000 cases of mineral water per year indefinitely. The current sales price is $149 per case, and the current cost per case is $104. The firm is taxed at a rate of 40%. Both prices and costs are expected to rise at a rate of 7% 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, because 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.) ______$


New-Project Analysis

The president of the company you work for has asked you to evaluate the proposed acquisition of a new chromatograph for the firm’s R&D department. The equipment’s basic price is $120,000, and it would cost another $18,000 to modify it for special use by your firm. The chromatograph, which falls into the MACRS 3-year class, would be sold after 3 years for $42,000. The MACRS rates for the first three years are 0.3333, 0.4445, and 0.1481. Use of the equipment would require an increase in net working capital (spare parts inventory) of $4,800. The machine would have no effect on revenues, but it is expected to save the firm $48,000 per year in before-tax operating costs, mainly labor. The firm’s marginal federal-plus-state tax rate is 30%.


What is the additional (nonoperating) cash flow in Year 3? Round your answer to the nearest dollar.

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University of Nairobi