Your boss asked you to evaluate a project with an infinite life. Sales and costs

Question

Your boss asked you to evaluate a project with an infinite life. Sales and costs project to $1,000 and $500 per year, respectively. (Assume sales and costs occur at the end of the year, i.e., profit of $500 at the end of year one.) There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs $3,000, what is the NPV?

$500.00

$1629.62

$365.38

$472.22

$500.00

$1629.62

$365.38

$472.22

Explanation / Answer

Ans

Details Amount Sales    1,000.00 Cost      -500.00 Net        500.00 Less Tax        150.00 After Tax Cash flow       350.00 Real Cash flows( Exclusive of inflation)       350.00 Real Rate of return required            0.10 Value of Perpetuity    3,500.00 Less Initial Cost -3,000.00 NPV       500.00 Note: Since both cash flows and required rate of return are real inflation is not considered.

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.