Question
Adam Andler Corp is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should
Adam Andler Corp 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. 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. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number.
WACC or cost of capital | 15.00% |
Net investment cost (depreciable basis) | $250,000 |
The salvage value of its equipment | $20,000 |
No other fixed assets will be acquired for following years | |
The company will require an increase in net working capital at the beginning | $10,000 |
The company will liquidate all working capital at the end of the project | -10,000 |
Units sold (constant through years) | 60,000 |
Average price per unit, Year 1 | $30.00 |
Fixed operating cost, exclude depreciation (constant through years) | $50,000 |
Variable operating cost per unit, Year 1 | $17.00 |
Variable operating cost and average price per unit increase every year at inflation rate | |
MARCS 3-year depreciation rate: | |
Depreciation rate for year 1 | 33.33% |
Depreciation rate for year 2 | 44.45% |
Depreciation rate for year 3 | 14.81% |
Depreciation rate for year 4 | 7.41% |
Expected inflation rate per year | 5.00% |
Tax rate | 35.00% |
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started