In: Finance
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. 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. What is the project's expected NPV? 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 |
58,000 |
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% |
a.
$66,796
b.
$75,339
c.
$92,426
d.
$77,669
e.
$61,359
If you can explain the steps for inflation portion, it would be appreciated. Thanks