Question

TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 3-year life and would have a zero salvage value, and no change in net operating working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. However, this project would compete with other TexMex products and would reduce their pre-tax annual cash flows. What is the project's NPV? (Hint: Cash flows are constant in Years 1-3.)

WACC                                                                                                                          10.0%

Pre-tax cash flow reduction for other products (cannibalization)                                         -$5,000

Investment cost (depreciable basis)                                                                           $80,000

Straight-line depreciation rate                                                                                  33.333%

Annual sales revenues                                                                                               $67,500

Annual operating costs (excl. depreciation)                                                             -$25,000

Tax rate                                                                                                                         35.0%

$3,636

$3,828

$4,019

$4,220

$4,431

Answer 1