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

Question

Desai 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. This is
just one of many projects for the firm, so any losses can be used to offset gains
on other firm projects. What is the project

Explanation / Answer

Cash flow for year 1 =((25*50000)-(2.20*50000)-150000-(1/3*200000))*(1-40%)+(1/3*200000)

=$80666.67

Cash flow for year 2 = ((25*50000)*(1.05)-(2.20*50000)*(1.05)-150000-(1/3*200000))*(1-40%)+(1/3*200000)

=$87866.67

Cash flow for year 3 = ((25*50000)*(1.05)^2-(2.20*50000)*(1.05)^2-150000-(1/3*200000))*(1-40%)+(1/3*200000)

=$95426.67

NPV

Hence,option (C), $17646 is the correct answer

Year Cash flow Present Value 0 -200000 -200000 1 80666.67 73333.33 2 87866.67 72617.08 3 95426.67 71695.47 NPV 17645.88

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

---

---

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