Sylvester Media Is Analyzing an Average-Risk Project,and the Following Data

question 46

Multiple Choice

Sylvester Media 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? $\begin{array}{lr}\text { WACC } & 10.0 \% \\\text { Net investment cost (depreciable basis) } & \$ 200,000 \\\text { Units sold } & 50,000 \\\text { Average price per unit, Year 1 } & \$ 25.00 \\\text { Fixed op. cost excl. deprec. (constant) } & \$ 150,000 \\\text { Variable op. cost/unit, Year 1 } & \$ 20.20 \\\text { Annual depreciation rate } & 33.333 \% \\\text { Expected inflation } & 4.00 \% \\\text { Tax rate } & 35.0 \%\end{array}$

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

---

Definitions:

External Failure Cost

Expenses incurred when a product fails to meet quality standards after being delivered to the customer, including returns, repairs, and lost sales.

Quality Cost Report

Internal report that details the costs associated with preventing, detecting, and correcting defective work, categorized into prevention, appraisal, and failure costs.

Internal Failure Cost

Costs incurred to rectify defects found before the delivery of a product to the customer, including rework, scrapping, and downtime.

Quality Cost Report

A document that outlines the expenses associated with preventing, detecting, and correcting defective work, providing insights into the cost of quality.