90.2K

Verified Solution

Link Copied!

Mario & Luigi LLC is considering to open a mushroom farm. The start-up costs are negligible. Instead of buying, ML LLC will lease the necessary equipment for $150,000 per year, which is a nominal cash flow. The nominal cash flows are as follows -

Revenues : 400,000

Labor costs : 200,000

Other costs : 90,000

Revenues will grow by 4% per year in real terms. Labor costs will grow by 5% per year in real terms. Other costs will grow by 2% per year in real terms. The rate of inflation is expected to be 4% per year. The required rate of return for this project is 7%. The company has a tax rate of 30%. All cash flows will occur one year from now. What is the NPV of the mushroom farm? Should ML LLC go ahead with the decision?

SLQ7. Mario \& Luigi LLC is considering to open a mushroom farm. The start-up costs are negligible. Instead of buying, Mario \& Luigi LLC will lease the necessary equipment for $150000 per year, which is a nominal cash flow. The nominal cash flows are as follows: Revenues will grow by 4% per year in real terms. Labor fosts will grow by 5% per year in real terms. Other costs will grow by 2% per year in real terms. The rate of inflation is expected to be 4% per year. The required rate of return for this project is 7% in real terms. The company has a tax rate of 30%. All cash flows will occur one year from now. What is the NPV of the mushroom farm? Should Mario and Luigi go ahead with the decision? [10 marks]

Answer & Explanation Solved by verified expert

See Answer