Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales...

90.2K

Verified Solution

Question

Finance

Desai Industries is analyzing an average-risk project, and thefollowing data have been developed. Unit sales will be constant,but the sales price should increase with inflation. Fixed costswill also be constant, but variable costs should rise withinflation. The project should last for 3 years, it will bedepreciated on a straight-line basis, and there will be no salvagevalue. No change in net operating working capital would berequired. This is just one of many projects for the firm, so anylosses on this project can be used to offset gains on other firmprojects. What is the project's expected NPV? Donot round the intermediate calculations and round the final answerto the nearest whole number.
WACC
10.0%
Net investment cost (depreciable basis)
$200,000
Units sold
58,000
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 rate per year
5.00%
Tax rate
40.0%
a.
$66,796
b.
$75,339
c.
$92,426
d.
$77,669
e.
$61,359
If you can explain the steps for inflation portion, it would beappreciated. Thanks

Answer & Explanation Solved by verified expert

3.7 Ratings (324 Votes)

See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Desai Industries is analyzing an average-risk project, and thefollowing data have been developed. Unit sales will be constant,but the sales price should increase with inflation. Fixed costswill also be constant, but variable costs should rise withinflation. The project should last for 3 years, it will bedepreciated on a straight-line basis, and there will be no salvagevalue. No change in net operating working capital would berequired. This is just one of many projects for the firm, so anylosses on this project can be used to offset gains on other firmprojects. What is the project's expected NPV? Donot round the intermediate calculations and round the final answerto the nearest whole number.WACC10.0%Net investment cost (depreciable basis)$200,000Units sold58,000Average price per unit, Year 1$25.00Fixed op. cost excl. depr. (constant)$150,000Variable op. cost/unit, Year 1$20.20Annual depreciation rate33.333%Expected inflation rate per year5.00%Tax rate40.0%a.$66,796b.$75,339c.$92,426d.$77,669e.$61,359If you can explain the steps for inflation portion, it would beappreciated. Thanks

WACC	10.0%
Net investment cost (depreciable basis)	$200,000
Units sold	58,000
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 rate per year	5.00%
Tax rate	40.0%