View the step-by-step solution to:

Poulsen Industries is analyzing an average-risk project and the following data have been developed. Unit sales will be constant but the sales price...

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 three 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?

WACC 10.0%
Net investment cost (depreciable basis) $200,000
Units sold 50,000
Average price per unit, Year 1 $25.00
Fixed oper. costs, excl. depreciation (constant) $150,000
Variable oper. cost per unit, Year 1 $20.20
Annual depreciation rate 33.333%
Expected inflation 4.00%
Tax rate 35.0%

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 three 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? WACC 10.0% Net investment cost (depreciable basis) $200,000 Units sold 50,000 Average price per unit, Year 1 $25.00 Fixed oper. costs, excl. depreciation (constant) $150,000 Variable oper. cost per unit, Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation 4.00% Tax rate 35.0%
Background image of page 1
Sign up to view the entire interaction

Top Answer

Dear Student Please find... View the full answer

Finance - 8211776.xls

If you want the formulas and any calculations, select the corresponding cell and press F2(Function Key on key board),
It will show all calculations and formulas Automatically
Please Give Me the...

Sign up to view the full answer

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Ask a homework question - tutors are online