The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the...
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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. It anticipates that the business will continue in perpetuity. Following the negligible start-up costs, BICC expects the following nominal cash flows at the end of the year:
Revenues $ 265,000
Labour costs 185,000
Other costs 55,000
The company will rent machinery for $90,000 per year. The rental payments start at the end of year 1 and are expressed in nominal terms. Revenues will increase by 4 percent per year in real terms. Labour costs will increase by 3 percent per year in real terms. Other costs will increase by 1 percent per year in real terms. The rate of inflation is expected to be 6 percent per year. BICCs required rate of return is 10 percent in real terms. There are no taxes. All cash flows occur at year-end. What is the NPV of BICCs proposed toad ranch today?
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