TexMex Products is considering a new salsa whose data are shown below. The equip

Question

TexMex Products is considering a new salsa whose data are shown below. The equipment that would be used would be depreciated by the straight-line method over its 3-year life, would have 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 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 in other products (cannibalization) $5,000
Investment cost (depr'ble basis) $65,000
Straight-line depr'n rate 33.333%
Sales revenues, each year $75,000
Annual operating costs, ex. depr'n $25,000
Tax rate 35.0%

a. $25,269
b. $26,599
c. $27,929
d. $29,325
e. $30,792

Explanation / Answer

d. $29,325 Cash flows Sales revenues $75,000 Less: operating costs $25,000 Less: Dep 21666.45 EBIT 28333.55 EAT 18416.8075 Add Dep 21666.45 cash flow 40083.2575 Initial Investment of the Project = [Investment Cost + Cannibalization cost] Initial Investment of the Project = [$65000 + $5,000] Initital Investment of the Project = $70000 NPV= -70000+40083.2575PVIFA(10%,3) = $29,325

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