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

$3,636

$3,828

$4,019

$4,220

$4,431

Answer 1

Annual Revenue	$ 67,500
Less:
Operating cost	$ 25,000
Depreciation	$ 26,666
reduction in cash flow of other product	5000
Net Income	$ 10,834
Less: Tax @35%	$    3,792
Net Income After Tax	$    7,042
Add: Depreciation	$ 26,666
Annual Cash flow after Tax	$ 33,708

Year	Cash Flow	PV Factor	PV Of Cash Flow
a	b	c=1/1.10^a	d=b*c
0	$ -80,000	1	$         -80,000.00
1	$   33,708	0.90909	$           30,643.64
2	$   33,708	0.82645	$           27,857.85
3	$   33,708	0.75131	$           25,325.32
	NPV		$                   3,828