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March 29, 2017

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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
$63,500
Annual operating costs (excl. depr.)
-$25,000
Tax rate
35.0%

The answer i chose was - 2,612 but i have a feeling it was wrong and if it rights it was by chance.It doesn't feel like I got it the right way . Need help

  • Finance ( Need help ) - ,

    the WACC 10%
    Pre-tax cash flow reduction for other products (cannibalization) -5000

    Investment cost (depreciable basis) 80,000
    Straight-line depr. rate 33.333%
    Sales revenues, each year for 3 year 63,500
    Annual operating costs(excl. depr.)-25,000
    Tax rate 35.0%

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