24 Jul WHAT IS THE DIFFERENCE IN THE EXPECTED NPV IF THE INFLATION ADJUSTMENT IS MADE VS. IF IT IS NOT MADE?
Sylvester Media is analyzing an average-risk project and the following data have been developed. Un Show more Sylvester Media 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? WACC 10.0% Net investment cost (depreciable basis) $200000 Units sold 50000 Average price per unit Year 1 $25.00 Fixed op. cost excl. deprec. (constant) $150000 Variable op. cost/unit Year 1 $20.20 Annual depreciation rate 33.333% Expected inflation 4.00% Tax rate 35.0% Show less
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