Inflation Adjustments

The Rodriguez Company is considering an average$-$risk investment in a mineral water spring project that has an initial after$-$tax cost of $$125,000.$ The project will produce $700$ cases of mineral water per year indefinitely, starting at Year $1.$ The Year$-1$ sales price will be $$128$ per case, and the Year$-1$ cost per case will be $$94.$ The firm is taxed at a rate of $25\%.$ Both prices and costs are expected to rise after Year $1$ at a rate of $7\%$ per year due to inflation. The firm uses only equity, and it has a cost of capital of $15\%.$ Assume that cash flows consist only of after$-$tax profits because the spring has an indefinite life and will not be depreciated.

a$.$ What is the present value of future cash flows? $($Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV$.)$ What is the NPV$?$ Do not round intermediate calculations. Round your answers to the nearest dollar. Negative values, if any, should be indicated by a minus sign.

PV of future CFs: $ $$

NPV:

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b$.$ Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the project's NPV$?$ Do not round intermediate calculatibns. Round your answer to the nearest dollar. Negative value, if any, should be indicated by a minus sign.

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