Question

In: Finance

TexMex Food Company is considering a new salsa whose data are shown below. The equipment to...

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

Solutions

Expert Solution

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

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