Question

Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would be used has a 3-year tax life and would be depreciated by the straight-line method over the project's 3-year life. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV? (Please be sure to show your calculations.)

                  Hurdle Rate                                                                       10%

                  Net initial investment                                                  $60,000

                  Initial increase in NOWC                                            $10,000

                  Salvage value                                                              $10,000

                  Sales revenues                                                             $70,000

                  Operating costs (excluding depreciation)                   $30,000

                  Tax rate                                                                             40%

Answer 1

Year 0 Cash flow=-Net initial investment-Initial Increase in NOWC=-10000-60000=-70000

Year 1-3 Operating Cash flow=(Sales revenues-Operating costs-Depreciation)*(1-tax rate)+Depreciation=(Sales revenues-Operating costs-Net initial investment/3)*(1-tax rate)+Net initial investment/3=(70000-30000-60000/3)*(1-40%)+60000/3=32000.00

Year 3 Other Cash flow=Increase in NOWC+Salvage value*(1-tax rtae)=10000+10000*(1-40%)=16000.00

NPV=Present value of cash flows=-70000+32000/10%*(1-1/1.1^3)+16000/1.1^3=21600.3005