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Latinos Inc. is a leading manufacturer of salsa and is currently evaluating a new product: extremely spicy salsa Picantisima. The company has finished a market
Latinos Inc. is a leading manufacturer of salsa and is currently evaluating a new product: extremely spicy salsa "Picantisima". The company has finished a market study that shows promising sales for the new product. The cost of the marketing study was $5,000. The main requirement for the new product is a new machine costing an estimated $240,000. Further, inventories would have to be increased by $25,000 to handle the new line. The machinery, which falls into class 39 with a 25% CCA rate, would be used for 2 years and have an expected salvage value of $25,000 at the end of this time. The Company's tax rate is 40% and its weighted average cost of capital is 10%. Earnings before interest, taxes, depreciation and amortization (EBITDA) are expected to be $180,000 per year for each of the next 2 years. Assume that the purchase of the machine and increase in inventory occur at the beginning of the first year of operations and that operating cash flows occur at the end of each of the two years of operations. Inventory is liquidated in Year 2. Calculate the NPV of the project as of Year 0. 21. What are the initial cash flows (time 0 cash flows) associated with starting up the project? A) -$270,000 B) -$25,000 -$265,000 D -$290,000 22. What are the operating cash flows associated with the project in year 1? A) $90,000 B) $120,000 $132,000 $153,000 23. What is the present value (at the end of the second year) of the remaining CCA tax shields in the years following the end of the project (i.e., what is the tax effect of disposition?). A) $25,000 $37,857 $44,138 $62,857
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