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Juan De La Vega Inc. is considering a project has is rated as an average-risk venture. This business opportunity aims to establish a production facility
Juan De La Vega Inc. is considering a project has is rated as an average-risk venture. This business opportunity aims to establish a production facility to produce and sell cases of mineral water. This project anticipates to cost $150,000. It will produce 1,000 cases of mineral water per year indefinitely. The current sales price is $138 per case, and the current cost per case (all variable) is $105. The firm is taxed at a rate of 34%. Both prices and costs are expected to rise on annual basis. Economists anticipate inflation rates to hit 6% per year in the foreseeable future. June De La Vega Inc. does not have any debt. The firm's cost of equity is 15%. The firm's cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated. A. Should the Juan De La Vega Inc. undertake the venture? B. If total costs consisted of a fixed cost of $10,000 per year and variable costs of $95 per unit, and if only the variable costs were expected to increase with inflation, would this make the project better or worse? Continue with the assumption that the sales price will rise with inflation
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