Some years ago, environmentally conscious McConnell’s Hamburgers Inc., a well-known fast-food chain (‘many billions sold’), introduced biodegradable containers in its restaurants. Encouraged by the success of the idea, the company decided to make its food also biodegradable. You are hired as a financial consultant to help analyze the viability of the idea. They anticipate that the business will continue in perpetuity. 

Following negligible startup costs, the company will incur the following nominal cash flows at the end of the year:

Revenues $150,000; 

Labor Costs $80,000; 

Other Costs $40,000; and 

Lease Payments $20,000. 

The company will lease machinery from a firm for $20,000 per year. The lease payment starts at the year 1 and are fixed in nominal terms. Sales will increase at 4% year in real terms. Labor costs will increase at 3% per year in real terms. Other costs will decrease at 1% per year in real terms. The rate of inflation is expected to be 6% per year. The real rate of discount for revenues and costs is 11%. The lease payments are risk-free and therefore must be discounted at the risk-free rate. The real risk-free rate is 7%. There are no taxes and all cash flows occur at year-end.

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What is the NPV of the project?

Answer rating: 100% (QA)

To calculate the Net Present Value NPV of the project we need to discount all the cash flows to thei... View the full answer