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? (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 $66000 Annual operating costs (excl. depr.) -$25,000 Tax rate 35.0% Answer 16980 16550 17260 13890 14030

Explanation / Answer

Annual depreciation tax shield =($80,000*333.33).35

=9333

annual net cash flow after tax= (66,000-25,000-5,000)(1-.35)+9333

=32733

NPV = 32733*PVAF-80,000

=32733*2.486-80,000

=1374

=

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