Poulsen Industries Is Analyzing an Average-Risk Project, and the Following

question 36

Multiple Choice

Poulsen 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, it will be depreciated on a straight-line basis, and there will be no salvage value. No change in net operating working capital would be required. 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. 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 inflation adjustment is required. What is the difference in the expected NPV if the inflation adjustment is made versus if it is not made?

• A) $12,018
• B) $12,650
• C) $13,316
• D) $13,982
• E) $14,681

---

Definitions:

Predictive Validity

The extent to which a test or measurement can accurately forecast or predict future outcomes or behaviors.

Criterion Validity

The extent to which a test's results correlate with other measures or outcomes that are already accepted as reflecting the variable being tested.

Epidemiological

Relating to the study of the distribution and determinants of health and diseases in populations.

Causal Relationship

A connection between two events where one event is understood to be directly responsible for causing the other.