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

question 28

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

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

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Definitions:

Orthodox Behaviorism

A branch of psychology that studies behavior as an observable entity without reference to mental states or internal processes.

Motivation, Thought, And Emotion

The interconnectedness of an individual's drive, cognitive processes, and feelings that guide behavior.

Exclusive Distribution

A distribution strategy where a supplier grants the right to sell its product to only one reseller within a specific geographic area.

Distribution Density

The measure of how widely and densely a product or service is available or distributed across a geographical area or market.