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 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 $73,500
Annual operating costs (excl. depr.) -$25,000
Tax rate 35.0%