FI515 Financial Management: (TCO H) TexMex Food Company is considering a new salsa

FI515 Financial Management
Week 6 Exam Question

(TCO H) 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 three-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 three-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 deprec. rate 33.333%
Sales revenues, each year for three years $67,500
Annual operating costs (excl. deprec.) - $25,000
Tax rate 35.0%

a. $3,636
b. $3,828
c. $4,019
d. $4,220
e. $4,431

Indicate your choice for your answer - a,b,c,d,e first and then show your work/explain your answer so as to earn partial credit in the event you selected the incorrect answer.
Powered by