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% |