Genetic Engineering Research Studies Ltd (GERS) has hired you as a consultant to evaluate the NPV of its proposed toad house. GERS plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity. Following the negligible start-up costs, GERS expects the following nominal cash flows at the end of the year:

The company will lease machinery for £20,000 per year. The lease payments start at the end of year 1 and are expressed in nominal terms. Revenues will increase by 5 per cent per year in real terms. Labour costs will increase by 3 per cent per year in real terms. Other costs will decrease by 1 per cent per year in real terms. The rate of inflation is expected to be 6 per cent per year. GERS’ required rate of return is 10 per cent in real terms. The company has a 28 per cent tax rate. All cash flows occur at year-end. What is the NPV of GERS’ proposed toad house today?

Transcribed Image Text:

Revenues Labour costs Other costs 150,000 80,000 40,000