Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 13, Problem 8P
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 1,000 cases of mineral water per year indefinitely. The current sales price is $138 per case, and the current cost per case is $105. The firm is taxed at a rate of 34%. 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 15%. Assume that cash flows consist only of after-tax profits, because the spring has an indefinite life and will not be
- a. Should the firm accept the project? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its
NPV .) - b. Suppose that total costs consisted of a fixed cost of $10,000 per year plus variable costs of $95 per unit, and only the variable costs were expected to increase with inflation. Would this make the project better or worse? Continue to assume that the sales price will rise with inflation.
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Inflation AdjustmentsThe Rodriguez Company is considering an average-risk investment in amineral water spring project that has a cost of $150,000. The project willproduce 1,000 cases of mineral water per year indefinitely. The current salesprice is $138 per case, and the current cost per case is $105. The firm istaxed at a rate of 34%. Both prices and costs are expected to rise at a rate of6% per year. 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 springhas an indefinite life and will not be depreciated.a. Should the firm accept the project? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.)b. Suppose that total costs consisted of a fixed cost of $10,000 per yearplus variable costs of $95 per unit, and only the variable costs wereexpected to increase with inflation. Would this make the project betteror worse? Continue to assume that the sales…
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Dinshaw Company is considering the purchase of a new machine. The invoice price of the machine is $87,306, freight charges are estimated to be $2,620, and installation costs are expected to be $7,370. The annual cost savings are expected to be $14,980 for 11 years. The firm requires a 20% rate of return. Ignore income taxes. What is the internal rate of return on this investment?
Internal rate of return %
Round to 0 decimal placese
Chapter 13 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 13 - Define each of the following terms:
Project cash...Ch. 13 - Prob. 2QCh. 13 - Why is it true, in general, that a failure to...Ch. 13 - Prob. 4QCh. 13 - Prob. 5QCh. 13 - Prob. 6QCh. 13 - Why are interest charges not deducted when a...Ch. 13 - Prob. 8QCh. 13 - Prob. 9QCh. 13 - Distinguish among beta (or market) risk,...
Ch. 13 - Prob. 11QCh. 13 - Talbot Industries is considering launching a new...Ch. 13 - Prob. 2PCh. 13 - Prob. 3PCh. 13 - Prob. 4PCh. 13 - Wendys boss wants to use straight-line...Ch. 13 - New-Project Analysis
The Campbell Company is...Ch. 13 - Prob. 7PCh. 13 - Inflation Adjustments
The Rodriguez Company is...Ch. 13 - Prob. 10PCh. 13 - Scenario Analysis Shao Industries is considering a...Ch. 13 - Prob. 1MCCh. 13 - Prob. 2MCCh. 13 - Prob. 3MCCh. 13 - Prob. 4MCCh. 13 - Prob. 5MCCh. 13 - Prob. 6MCCh. 13 - Calculate the cash flows for each year. Based on...Ch. 13 - Prob. 8MCCh. 13 - (1) What are the three types of risk that are...Ch. 13 - Prob. 12MCCh. 13 - Prob. 13MCCh. 13 - What is a real option? What are some types of real...
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- The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% 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? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?arrow_forwardOperating cash flow. Huffman Systems has forecasted sales for its new home alarm systems to be 65,000 units per year at $40.00 per unit. The cost to produce each unit is expected to be about 40% of the sales price. The new product will have an additional $480,000 of fixed costs each year, and the manufacturing equipment will have an initial cost of $3,100,000 and will be depreciated over eight years (straight line). The company tax rate is 38%. What is the annual operating cash flow for the alarm systems if the projected sales and price per unit are constant over the next eight years? What is the annual operating cash flow for the alarm systems? (Round to the nearest dollar.)arrow_forward2. ABC Corporation plans to set aside $50,000 per year beginning 1 year from nowfor replacing equipment 6 years from now. What will be the purchasing power (interms of current-value dollars) of the amount accumulated, if the investment growsby 10% per year, but inflation averages 4% per year?arrow_forward
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