Discussion: Inflation Adjustments
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?