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 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 on other firm projects. What is the project's NPV?
WACC 10.00%
Net investment cost (depreciable basis) $200,000.00
Units sold 60,000
Average price per unit, Year 1 $28.00
Fixed operating costs excluding depreciation (constant) $150,000.00
Variable operating costs/unit, Year 1 $22.00
Expected inflation rate per year 7.00%
Tax rate 40.00%

A 234578

B113790

C 554681

D 215670

Answer 1

Time line		0	1	2	3
Cost of new machine		-200000
=Initial Investment outlay		-200000
Sales			1680000	1797600	1923432
Profits	Sales-variable cost		360000	385200	412164
Fixed cost			-150000	-150000	-150000
-Depreciation	Cost of equipment/no. of years		-66666.67	-66666.667	-66666.67
=Pretax cash flows			143333.33	168533.333	195497.33
-taxes	=(Pretax cash flows)*(1-tax)		86000	101120	117298.4
+Depreciation			66666.667	66666.6667	66666.667
=after tax operating cash flow			152666.67	167786.667	183965.07
+Tax shield on salvage book value	=Salvage value * tax rate				0
=Terminal year after tax cash flows					0
Total Cash flow for the period		-200000	152666.67	167786.667	183965.07
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331
Discounted CF=	Cashflow/discount factor	-200000	138787.88	138666.667	138215.68
NPV=	Sum of discounted CF=	215670