Question

1. 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 (depr'ble basis) $65,000
Straight-line depr'n rate 33.333%
Sales revenues, each year $75,000
Annual operating costs, ex. depr'n $25,000
Tax rate 35.0%

Answer 1

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