Poulsen Industries is analyzing an average-risk project, and the following data

ID: 2766905 • Letter: P

Question

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. This is just one of many projects for the firm, so any losses 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 adjustment is required. What is the difference in the expected NPV if the inflation adjustment is made vs. if it is not made? $13,286 $13,985 $14,721 $15,457 $16,230

Explanation / Answer

Answer is (c)

Working:

NPV with no inflation adjustment

t=0

t=1

t=2

t=3

Investment cost

WACC=10%

$ (200,000)

Inflation

0.00%

Price per unit

$ 25

VC per unit

$ 20

Unit sold

$ 50,000

Sales Revenue

$ 1,250,000

Fixed Cost

$ 150,000

Variable Cost

$ 1,010,000

Depreciation

Rate=33.33%

$ 66,660

Operating Income

$ 23,340

$ 90,000

Taxes

Rate=35%

$ 8,169

$ 31,500

Profit after taxes

$ 15,171

$ 58,500

Depreciation

Rate=33.33%

$ 66,660

Operating cash flow

$ (200,000)

$ 81,831

$ 125,160

PVF@10%

$ 1

$ (200,000)

$ 74,392

$ 103,438

$ 94,035

$ 71,864

NPV with inflation adjustment

NPV with no adjustment

t=0

t=1

t=2

t=3

Investment cost

WACC=10%

$ (200,000)

Inflation

4.00%

Price per unit

$ 25

$ 26

$ 27

VC per unit

$ 20

$ 21

$ 22

Unit sold

$ 50,000

Sales Revenue

$ 1,250,000

$ 1,300,000

$ 1,352,000

Fixed Cost

$ 150,000

Variable Cost

$ 1,010,000

$ 1,050,400

$ 1,092,500

Depreciation

Rate=33.33%

$ 66,660

Operating Income

$ 23,340

$ 99,600

$ 109,500

Taxes

Rate=35%

$ 8,169

$ 34,860

$ 38,325

Profit after taxes

$ 15,171

$ 64,740

$ 71,175

Depreciation

Rate=33.33%

$ 66,660

Operating cash flow

$ (200,000)

$ 81,831

$ 131,400

$ 137,835

PVF@10%

$ 1

$ (200,000)

$ 74,392

$ 108,595

$ 103,557

$ 86,544

Diffrence

14679.9399

NPV with no inflation adjustment

t=0

t=1

t=2

t=3

Investment cost

WACC=10%

$ (200,000)

Inflation

0.00%

Price per unit

$ 25

VC per unit

$ 20

Unit sold

$ 50,000

Sales Revenue

$ 1,250,000

Fixed Cost

$ 150,000

Variable Cost

$ 1,010,000

Depreciation

Rate=33.33%

$ 66,660

Operating Income

$ 23,340

$ 90,000

Taxes

Rate=35%

$ 8,169

$ 31,500

Profit after taxes

$ 15,171

$ 58,500

Depreciation

Rate=33.33%

$ 66,660

Operating cash flow

$ (200,000)

$ 81,831

$ 125,160

PVF@10%

$ 1

$ (200,000)

$ 74,392

$ 103,438

$ 94,035

$ 71,864

NPV with inflation adjustment

NPV with no adjustment

t=0

t=1

t=2

t=3

Investment cost

WACC=10%

$ (200,000)

Inflation

4.00%

Price per unit

$ 25

$ 26

$ 27

VC per unit

$ 20

$ 21

$ 22

Unit sold

$ 50,000

Sales Revenue

$ 1,250,000

$ 1,300,000

$ 1,352,000

Fixed Cost

$ 150,000

Variable Cost

$ 1,010,000

$ 1,050,400

$ 1,092,500

Depreciation

Rate=33.33%

$ 66,660

Operating Income

$ 23,340

$ 99,600

$ 109,500

Taxes

Rate=35%

$ 8,169

$ 34,860

$ 38,325

Profit after taxes

$ 15,171

$ 64,740

$ 71,175

Depreciation

Rate=33.33%

$ 66,660

Operating cash flow

$ (200,000)

$ 81,831

$ 131,400

$ 137,835

PVF@10%

$ 1

$ (200,000)

$ 74,392

$ 108,595

$ 103,557

$ 86,544

Diffrence

14679.9399

Navigate

Poulsen Industries is analyzing an average-risk project, and the following data

Poultry breeders have developed breeds of chickens that differ radically in egg

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

Poulsen Industries is analyzing an average-risk project, and the following data

Question

Explanation / Answer

Related Questions

Navigate