Question

The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. BICC plans to breed toads and sell them as ecologically desirable insect control mechanisms. They anticipate that the business will continue into perpetuity. Following the negligible start-up costs, BICC expects the following nominal cash flows at the end of the year:

Revenues	$	280,000
Labor costs		200,000
Other costs		70,000

The company will lease machinery for $105,000 per year. The lease payments start at the end of Year 1 and are expressed in nominal terms. Revenues will increase by 5 percent per year in real terms. Labor costs will increase by 4 percent per year in real terms. Other costs will increase by 2 percent per year in real terms. The rate of inflation is expected to be 7 percent per year. The required rate of return is 12 percent in real terms. The company has a 38 percent tax rate. All cash flows occur at year-end.

What is the NPV of the proposed toad ranch today?

Answer 1