Question

Q1. Carla is considering a project where the Units will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years. Straight line depreciation method would be used and there will be no salvage value. No change in net operating working capital would be required. What is the difference in the expected NPV before and after inflation? Kindly show working and formula on every step?

Equipment cost $250,000

Units sold 60,000

Price per unit $25.00

Fixed costs $150,000

Variable cost/unit $20

Depreciation rate 33.33%

Expected inflation 4.00%

Tax rate 40.0%

WACC 10.0%

Answer 1

Ans.

NPV before Inflation

A/1	B	C	D	E	F
2	Year 0	Year 0	Year 1	Year 2	Year 3
3	Initial investment	$ (250,000.00)
4	Sales revenue		$ 1,500,000.00	$ 1,500,000.00	$ 1,500,000.00
5	Less: Variable cost		$ 1,200,000.00	$ 1,200,000.00	$ 1,200,000.00
6	Less: Fixed costs other than dep		$    150,000.00	$    150,000.00	$    150,000.00
7	Less: Depreciation		$      83,325.00	$      83,325.00	$      83,325.00
8	Profit before tax		$      66,675.00	$      66,675.00	$      66,675.00
9	Less tax@40%		$      26,670.00	$      26,670.00	$      26,670.00
10	Profit after tax		$      40,005.00	$      40,005.00	$      40,005.00
11	Add: Depreciation		$      83,325.00	$      83,325.00	$      83,325.00
12	Cash inflow after tax		$    123,330.00	$    123,330.00	$    123,330.00
13	Total cash flows	$ (250,000.00)	$    123,330.00	$    123,330.00	$    123,330.00
14	Discounting Factor @ 10%	1	0.909090909	0.826446281	0.751314801
15	Present Value	$ (250,000.00)	$    112,118.18	$    101,925.62	$      92,659.65
16	Net Present Value	$    56,703.46

Formulas

A/1	B	C	D	E	F
2	Year 0	Year 0	Year 1	Year 2	Year 3
3	Initial investment	-250000
4	Sales revenue		=60000*25	=60000*25	=60000*25
5	Less: Variable cost		=60000*20	=60000*20	=60000*20
6	Less: Fixed costs other than dep		150000	150000	150000
7	Less: Depreciation		=250000*33.33%	=250000*33.33%	=250000*33.33%
8	Profit before tax		=+D4-D5-D6-D7	=+E4-E5-E6-E7	=+F4-F5-F6-F7
9	Less tax@40%		=+D8*40%	=+E8*40%	=+F8*40%
10	Profit after tax		=+D8-D9	=+E8-E9	=+F8-F9
11	Add: Depreciation		=+D7	=+E7	=+F7
12	Cash inflow after tax		=+D10+D11	=+E10+E11	=+F10+F11
13	Total cash flows	=SUM(C3:C12)	=+D12	=+E12	=+F12
14	Discounting Factor @ 10%	1	=+C14/1.1	=+D14/1.1	=+E14/1.1
15	Present Value	=+C13*C14	=+D13*D14	=+E13*E14	=+F13*F14
16	Net Present Value	=+C15+D15+E15+F15

NPV after Inflation

A/1	B	C	D	E	F
2	Year 0	Year 0	Year 1	Year 2	Year 3
3	Initial investment	$ (250,000.00)
4	Sales revenue		$ 1,500,000.00	$ 1,560,000.00	$ 1,622,400.00
5	Less: Variable cost		$ 1,200,000.00	$ 1,248,000.00	$ 1,297,920.00
6	Less: Fixed costs other than dep		$    150,000.00	$    150,000.00	$    150,000.00
7	Less: Depreciation		$      83,325.00	$      83,325.00	$      83,325.00
8	Profit before tax		$      66,675.00	$      78,675.00	$      91,155.00
9	Less tax@40%		$      26,670.00	$      31,470.00	$      36,462.00
10	Profit after tax		$      40,005.00	$      47,205.00	$      54,693.00
11	Add: Depreciation		$      83,325.00	$      83,325.00	$      83,325.00
12	Cash inflow after tax		$    123,330.00	$    130,530.00	$    138,018.00
13	Total cash flows	$ (250,000.00)	$    123,330.00	$    130,530.00	$    138,018.00
14	Discounting Factor @ 10%	1	0.909090909	0.826446281	0.751314801
15	Present Value	$ (250,000.00)	$    112,118.18	$    107,876.03	$    103,694.97
16	Net Present Value	$    73,689.18

Formulas

A/1	B	C	D	E	F
2	Year 0	Year 0	Year 1	Year 2	Year 3
3	Initial investment	-250000
4	Sales revenue		=60000*25	=60000*26	jeff jeffy Next > < Previous Related Solutions Carla is considering a project where the Units will be constant, but the sales price should... Carla is considering a project where the Units will be constant, but the sales price should increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years. Straight line depreciation method would be used and there will be no salvage value. No change in net operating working capital would be required. What is the difference in the expected NPV before and after inflation? Equipment cost $250,000 Units sold... A 7-year project is expected to generate annual sales of 10,400 units at a price of... A 7-year project is expected to generate annual sales of 10,400 units at a price of $91 per unit and a variable cost of $62 per unit. 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