International Buckeyes is building a factory that can make 1 million buckeyes a year for five years.
Question:
International Buckeyes is building a factory that can make 1 million buckeyes a year for five years. The factory costs \($6\) million. In year 1, each buckeye will sell for \($3.15\) in nominal terms. The price will rise 5 percent each year in real terms. During the first year variable costs will be \($0.2625\) per buckeye in nominal terms and will rise by 2 percent each year in real terms. International Buckeyes will depreciate the value of the factory to zero over the five years by use of the straight-line method. International Buckeyes expects to be able to sell the factory for \($638,140.78\) at the end of year 5 (or \($500,000\) in real terms). The nominal discount rate for risky cash flows is 20 percent. The nominal discount rate for riskless cash flows is 11 percent. The rate of inflation is 5 percent. Cash flows, except the initial investment, occur at the end of the year. The corporate tax rate is 34 percent; capital gains are also taxed at 34 percent. What is the net present value of this project?
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