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 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.)

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 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 for other products (cannibalization)	
-$5,000
Investment cost (depreciable basis)	
$80,000
Straight-line depr. rate	
33.333%
Sales revenues, each year for 3 years	
$63,500
Annual operating costs (excl. depr.)	
-$25,000
Tax rate	
35.0%
 
The answer i chose was  - 2,612 but i have a feeling it was wrong and if it rights it was by chance.It doesn't feel like I got it the right way . Need help

Alexis · Answer

the WACC 10%
Pre-tax cash flow reduction for other products (cannibalization) -5000

Investment cost (depreciable basis) 80,000
Straight-line depr. rate 33.333%
Sales revenues, each year for 3 year 63,500
Annual operating costs(excl. depr.)-25,000
Tax rate 35.0%