Poulsen Industries is analyzing an average-risk project, and the following data

Question

Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs should rise with inflation. The project should last for 3 years, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. This is just one of many projects for the firm, so any losses on this project can be used to offset gains on other firm projects. The marketing manager does not think it is necessary to adjust for inflation since both the sales price and the variable costs will rise at the same rate, but the CFO thinks an inflation adjustment is required. What is the difference in the expected NPV if the inflation adjustment is made versus if it is not made? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC 10.0% Net investment cost (depreciable basis) $200,000 Units sold Average price per unit, Year 1 $25.00 Fixed op. cost excl. depr. (constant) $150,000 Variable op. cost/unit, Year 1 $20.20 Annual depreciation rate Expected inflation 400% Tax rate 38,000 33 333% 400% O $10,327 o $9,707 O $12,908 O $10,017 O $7,952

Explanation / Answer

NPV calculation without inflation adjustment:

NPV calculation with inflation adjustment:

NPV calculation:

Difference in NPV = NPV with inflation adjustment - NPV without inflation adjustment

= -$75,012 – (-$85,340)

= $10,327

Therefore correct answer is option: $10,327

Year (t) Value of Asset Depreciation (straight line)D : asset/4 Revenue per year ($25*38,000 units) Fixed cost Variable cost ($20.20*38000 units) Before Tax cash Flow (BTCF) = ( Revenue -Fixed cost -variable cost) Taxable Income = (BTCF - depreciation) Income taxes = (Taxable Income *40%) After tax cash flow (ATCF) = (BTCF - Income tax) PV of after tax cash flow @WACC = ATCF/ (1+10%)^t 0 $200,000 N/A -$200,000 0 0 -$200,000 -$200,000 1 $66,666.67 $950,000 $150,000 $767,600 $32,400 ($34,267) ($13,707) $46,107 $41,915 2 $66,666.67 $950,000 $150,000 $767,600 $32,400 ($34,267) ($13,707) $46,107 $38,105 3 $66,666.67 $950,000 $150,000 $767,600 $32,400 ($34,267) ($13,707) $46,107 $34,641 NPV (sum of PVs) ($85,340)

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

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