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 (depreciableble basis) $65,000 Straight-line depreciation rate 33.333% Sales revenues, each year $75,000 Annual operating costs, ex. depreciation $25,000 Tax rate 35.0%

$25,269 $26,599 $27,929 $29,325 $30,792

Explanation / Answer

$29,325

3,828

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