Question

In: Finance

Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...

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

38,000

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

4.00%

Tax rate

40.0%

Answer choice

$10,327

$9,707

$12,908

$10,017

$7,952

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE


Related Solutions

Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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 wouThis is just one of many projects for the firm, so...
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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. Under the new tax law, the equipment for the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project’s life,...
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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. Under the new tax law, the equipment for the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project’s life,...
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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...
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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...
Poulsen Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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...
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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...
Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...
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...
Desai Industries is analyzing an average risk project, and the following data have been developed Unit...
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 beconstant, but variable costs should rise with inflation. The project should last for 3 years, it will bedepreciated on a straight line basis, and there will be no salvage value. This is just one of many projectsfor the firm, so any losses can be used to offset gains...
Waste Management Inc. is analyzing an average-risk project, and the following data have been developed. Unit...
Waste Management Inc. is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price will increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years, and there will be no salvage value. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. What is the project's...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT