Eastern Clothing Company is considering manufacturing a new style of shirt, whos

Question

Eastern Clothing Company is considering manufacturing a new style of shirt, 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 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 Eastern's products and would reduce their pre-tax annual cash flows. What is the project's NPV? WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) $5,000 Investment cost (depreciable basis) $80,000 Straight-line deprec. rate 33.333% Sales revenues, each year for 3 years $67,500 Annual operating costs (excl. deprec.) $25,000 Tax rate 35.0%

Explanation / Answer

Particulars Year Cash Flows PVF @ 10% PV Initial Investment 0 -80,000.00               1.00 -80,000.00 Net Income ( Net of Tax) 1 to 3    27,625.00               2.49    68,700.61 Savings in cost ( Net of tax) 1 to 3       3,250.00               2.49      8,082.43 Tax Saving on depreciation 1 to 3       9,333.45               2.49    23,211.36 Net Present Value    19,994.39

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