TexMex Food Company is considering a new salsa whose data are shown below. The e

Question

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 3-year life and would have a zero salvage value, and no change in net operating 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? wACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depreciation rate 33.333% Annual sales revenues $67,500 Annual operating costs (excl. depreciation) -$25,000 Tax rate 35.0%

Explanation / Answer

Project NPV: . $3,828

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