- CENGAGE MINDTAP Ch 11: Assignment - Cash Flow Estimation and Risk Analysis Attempts Do No Harm / 2 3. Inflation in project analysis It is often easy to overlook the impact of Inflation on the net present value of the project. Not incorporating the impact of Inflation in determining th value of the cash flows of the project can result in erroneous estimations Consider the following scenario: Houston and Smith Corp. is considering opening a new division to produce units that it expects to sell at a price of $14,950 each in the first year of the project. The company expects the cost of producing each unit to be $7,100 in the first year, however, it expects the selling price and cost per unit to increase by 1% each year. Based on the preceding Information, the company expects the selling price in the fourth year of the project to be cost per unit in the fourth year of the project to be and it expects the $15,403 $15,100 Which of the following statements about inflation's effect on net present value (NPV) is correct? When the selling price and cost per unit are expected to increase at the same rate, you do not need to $15,250 bn into account when performing a capital budgeting analysis. $15,557 When the selling price and cost per unit are expected to increase at the same rate, forgetting to take inflation into account in a capital budgeting analysis will typically cause the estimated NPV to be lower than the true NPV. Assignment - Cash Flow Estimation and Risk Analysis mpts Do No Harm/2 Inflation in project analysis s often easy to overlook the impact of inflation on the net present value of the project. Not incorporating the impact of Inflation in determ lue of the cash flows of the project can result in erroneous estimations. onsider the following scenario: Houston and Smith Corp. is considering opening a new division to produce units that it expects to sell at a price of $14,950 each in the first year of the project. The company expects the cost of producing each unit to be $7,100 in the first year; however, it expects the selling price and cost per unit to increase by 1% each year. Based on the preceding Information, the company expects the selling price in the fourth year of the project to be and it expects cost per unit in the fourth year of the project to be which of the following statements about inflation's $7,171 het present value (NPV) is correct? $7,315 When the selling price and cost per unit ed to increase at the same rate, you do not need to take inflation into account when performing a capital budgeting analysis. $7,388 When the selling price and cost per unit $7.243 od to increase at the same rate, forgetting to take inflation into account in a capital budgeting analysis will typically cause the estimated NPV to be lower than the true NPV. West I SENTIUM, TONY SAVELLI DEL TUUU YOU PROJELL UUE and expects the cost per unit in the fourth year of the project to be Which of the following statements about inflation's effect on net present Value (NPV) is correct? When the selling price and cost per unit are expected to increase at the same rate, you do not need to take inflation into account when performing a capital budgeting analysis When the selling price and cost per unit are expected to increase at the same rate, forgetting to take inflation into account in a capital budgeting analysis will typically cause the estimated NPV to be lower than the true NPV