The Rodriquez Company is considering an average risk investment in a mineral water spring project that has a cost of 150,000. The project 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 percent. Both prices and costs are expected to rise at a rate of 6 percent per year. The firm uses only equity and it has a cost of capital of 15 percent. Assume that cash flow consist only of after tax profits, since the spring has an indefinite life and will not be depreciated?
a. should the firm accept the project? Hint the project is perpetuity so you must use the formula for perpetuity to find its npv.
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 cost 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