Problem 11-8 Inflation Adjustments

The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has a cost of $150,000. The project will produce 800 cases of mineral water per year indefinitely. The current sales price is $136 per case, and the current cost per case is $99. The firm is taxed at a rate of 40%. Both prices and costs are expected to rise at a rate of 6% per year. The firm uses only equity, and it has a cost of capital of 14%. Assume that cash flows consist only of after-tax profits, since the spring has an indefinite life and will not be depreciated.

1. WhatistheNPVoftheproject?Donotroundintermediatesteps.Roundyouranswertothenearesthundreddollars.(Hint:Theprojectisagrowingperpetuity,soyoumustusetheconstantgrowthformulatofinditsNPV.)

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