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

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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? (Hint: Cash flows are constant in Years 1-3.) WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depr. rate 33.333% Annual sales revenues $74,000 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0%

Answer a. $13,618 b. $11,181 c. $14,335 d. $17,632 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? (Hint: Cash flows are constant in Years 1-3.) WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depr. rate 33.333% Annual sales revenues $74,000 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0%

10.0% -$5,000 $80,000 33.333% $74,000 -$25,000 35.0% $13,618 $11,181 $14,335 $17,632 WACC 10.0% Pre-tax cash flow reduction for other products (cannibalization) -$5,000 Investment cost (depreciable basis) $80,000 Straight-line depr. rate 33.333% Annual sales revenues $74,000 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0%

Explanation / Answer

AnsTexMex 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% a. $3,636 b. $3,828 c. $4,019 d. $4,220 e. $4,431 The Answer is B 3828.

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