Question

American Company is considering a new product 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 American products and would reduce their pre-tax annual cash flows. What is the project's NPV? IRR? Please include excel cells and formulas.

WACC	10.0%
Pre-tax cash flow reduction for other products (cannibalization)	−$5,000
Investment cost (depreciable basis)	$80,000
Annual sales revenues	$67,500
Annual operating costs (excl. depreciation)	−$25,000
Tax rate	35.0%

Answer 1