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.) Do not round the intermediate calculations and round the final answer to the nearest whole number.

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%

Annual sales revenues

$68,000

Annual operating costs (excl. depr.)

-$25,000

Tax rate

35.0%

Group of answer choices

$4,636

$3,940

$5,192

$4,358

$3,570

Answer 1

Net present value is calculated as present value of cash inflow less present value of cash outflow
Calculate net present value as shown below:
Time	0	1	2	3
Initial investment	-$80,000
Sales revenue		$68,000	$68,000	$68,000
Canalization costs		-$5,000	-$5,000	-$5,000
Operating costs		-$25,000	-$25,000	-$25,000
Depreciation (80000*33.333%)		-$26,666	-$26,666	-$26,666
Operating income		$11,334	$11,334	$11,334
Taxes		-$3,967	-$3,967	-$3,967
After tax net income		$7,367	$7,367	$7,367
Add: Depreciation		$26,666	$26,666	$26,666
Cash flow	-$80,000	$34,033	$34,033	$34,033
Discount factor @ 10%	$1.00000	$0.90909	$0.82645	$0.75131
	1/(1.1^0)	1/(1.1^1)	1/(1.1^2)	1/(1.1^3)
Present value	-$80,000	$30,939	$28,127	$25,570
Net present value	$4,636
Thus, net present value is $4,636