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's expected NPV?
WACC
10.0%
Net investment cost (depreciable basis)
$200,000
Units sold
48,000
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
33.333%
Expected inflation rate per year
5.00%
Tax rate
40.0%




1. $2,831

2. $2,598

3. $3,065

4. $2,442

5. $2,779

Explanation / Answer

Year Sale Price per unit Variable cost per unit Contribution margin per unit Total units sold Total contribution Fixed cost Dep. Profit Tax @40% Profit after tax Cash flow after tax P.v. of discounting factor Present value of cash flow after tax 1 25 20.2 4.8 48000 230400 150000 66666 13734 5493.6 8240.4 74906.4 0.909 68,089.92 2 26.25 21.21 5.04 48000 241920 150000 66666 25254 10101.6 15152.4 81818.4 0.826 67,582.00 3 27.5625 22.2705 5.292 48000 254016 150000 66666 37350 14940 22410 89076 0.751 66,896.08 202567.99 960000 Year Outflow 0 -200000 Net present value = Outflow -present value of inflow     = 200,000 - 202,568 $2,568 Answer will be 2,598 due to rounding error

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