Problem :
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 depreciation rate 33.333%
•Annual sales revenues $67,500
•Annual operating costs (excl. depreciation) -$25,000
•Tax rate 35.0%