Question

The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. The company 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, the company expects the following nominal cash flows at the end of the year: |

Revenues | $ | 490,000 | |

Labor costs | 239,000 | ||

Other costs | 88,000 | ||

The company will lease machinery for $215,000 per year. The lease payments start at the end of Year 1 and are expressed in nominal terms. Revenues will increase by 6 percent per year in real terms. Labor costs will increase by 5 percent per year in real terms. Other costs will increase by 3 percent per year in real terms. The rate of inflation is expected to be 6 percent per year. The required rate of return for this project is 10 percent in real terms. The company has a tax rate of 25 percent. All cash flows occur at year-end. |

What is the NPV of the proposed toad ranch today? |

Answer #1

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....

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