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

question 25

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. 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?

• A) $13,286
• B) $13,985
• C) $14,721
• D) $15,457
• E) $16,230

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Definitions:

Representative Sample

A subset of a population that accurately reflects the members of the entire population, used in research to draw conclusions about the population as a whole.

Random Sample

A method of selecting a sample from a population in which each individual has an equal probability of being chosen.

Public Pension System

A government-established program designed to provide retirement income to individuals who have contributed to the system during their working years.

Inferential Statistics

A branch of statistics that allows us to make predictions or inferences about a population based on a sample of data taken from that population.