10. (TCO H) TexMex Food Company is considering a new salsa whose data are shown

Question

10. (TCO H) 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 three-year life and would have a zero salvage value, and no new working capital would be required. Revenues and other operating costs are expected to be constant over the project’s three-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
Pre-tax cash flow reduction for other products (cannibalization)
Investment cost (depreciable basis)
Straight-line deprec. rate
Sales revenues, each year for three years
Annual operating costs (excl. deprec.)
Tax rate 10.0%
$5,000
$80,000
33.333%
$67,500
$25,000
35.0%

Explanation / Answer

Sales 67500 67500 67500
Less: Expenses 25000 25000 25000
Less: Dep 26666.66667 26666.66667 26666.66667
EBT 15833.33333 15833.33333 15833.33333
Less Taxes 5541.666667 5541.666667 5541.666667
EAT 10291.66667 10291.66667 10291.66667
Cannibalization (After Tax Effect) 3250 3250 3250
Cash Flow From Project 33708.33333 33708.33333 33708.33333
Investment -80000
Net Cash Flow -80000 33708.33333 33708.33333 33708.33333
PV factor 1 0.909090909 0.826446281 0.751314801
Present Value -80000 30643.93939 27858.12672 25325.56975

NPV
3,828 is answer

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