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Desai Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price should
Desai 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 used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = o. At the end of the project's life, the equipment would 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. What is the project's expected NPV? Do not round the intermediate calculations and round the final answer to the nearest whole number. WACC Equpiment cost Units sold Average price per unit, Year 1 Fixed op. costs (constant) Variable op. cost/unit, Year 1 Expected annual inflation rate Tax rate 10.0% $200,000 55,000 $26.00 $150,000 $20.60 5.00% 25.0%
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SOLUTION To calculate the projects expected NPV we need to calculate the cash flows for each year and discount them back to the present value using the weighted average cost of capital WACC Here are t...Get Instant Access to Expert-Tailored Solutions
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