Question
Deed 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
Deed 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 cost 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. What is the projects expected NPV?
WACC 10.0%
Net investment cost (depreciable basis) $200,000
Units sold 60,000
Average price per unit, Year 1 $28.00
Fixed op. cost excl. deprec. (constant) $150,000
Variable op. cost/unit, Year 1 $22.00
Annual depreciation rate 33.333%
Expected inflation rate per year 7.00%
Tax rate 40.0%
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