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. 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, the equipment will have no salvage value. No change in net operating working capital (NOWC) would be required for the project. 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% Equipment cost $200,000 Units sold 54.000 Average price per unit, Year 1 $25.00 Fixed op. cost excl. depr. (constant) $150,000 Variable op. cost/unit. Year 1 $20.20 Expected annual inflation rate 4.0% Tax rate 25.0% $12.621 $13,648 $16,437 $18,345 $15,409

Answer 1

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ANSWER : 18345

% Cut 310 311 312 313 315 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x Σ AutoSum : A Calibri 11 AA = = = pt Wrap Text General E Copy Fill 2 m Paste B I U B- SF A Merge Merge & Center - Center Format Painter $ -% % 4:0 .00 . Conditional Format Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing A0308 fax - AK AL AM AN AO AP AQ AR AS AT AU AV 308 1350000*(1+0.04) 309 1090800*(1+0.04) NO INFLATION WITH INFLATION REVENUES 54000 X 25 1350000 54000 X 25 1404000 1460160 [1404000*(1+0.04)] VARIABLE COSTS 54000 x 20.20 1090800 54000 x 20.20 1090800 1134432 1179809.28 [1134432*(1+0.04)] FIXED COST 150000 150000 150000 150000 314 DEPRECIATION 0.00 0.00 0.00 0.00 EBT 109200.00 109200.00 119568.00 130350.72 316 TAX 25% 27300.00 27300.00 29892.00 32587.68 NET INCOME 81900.00 81900.00 89676.00 97763.04 DEPRECIATION 0.00 0.00 0.00 0.00 319 NET CASH FLOW 81900.00 81900.00 89676.00 97763.04 320 PVIFA @10%,3 YEARS 2.486852 0.909091 0.826446 0.751315 <---------- PVIF @10%,3 YEARS 321 [FORMULA =(1/r)*(1-(1/(1+r)^n)) [FORMULA =(1/(1+r)^n) 322 323 PV OF ALL CASH FLOW 203673.18 74454.55 74112.40 73450.82 222017.76 NET INVESTMENT -150000 -150000 325 NPV = 53673.18 72017.76 326 ANSWER: CHANGE IN NPV = 18345 [ROUNDED] 327 [72017.76-53673.18] 228 M EAC MACRS NPV RELEVANT BETA LEVERED REPLACEMENT BOND OPTION TO WAITSTEIN indiffEPS EBIT LEASE STRAIGHT LINE GOLF IRR MACRS BASE CASE SENSITIVITY I LI O Rea ferences: ED12 BO! 120% - -_+ ... * * ENG 25-11-2019 317 318 324 R