Part 1:

BlueDenim Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by the straight-line method over its 4-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 4-year life. However, this project would compete with other Weston's products and would reduce their pre-tax annual cash flows. How much is the operating cash flow from this project each year?

Cost of Capital = 10.0%

Pre-tax cash flow reduction from other products (cannibalization) = $5,000

Investment cost (depreciable basis) = $80,000

Straight-line deprec. rate = 25%

Sales revenues, each year for 3 years = $67,500

Annual operating costs (excl. deprec.) = $25,000

Tax rate = 25.0%

A) $37,550

B) $34,150

C) $33,125

D) $27,642

E) $27,190

Part 2:

Based on your cash flow estimation for Blue Denim Company in the last question, how much is the new project's NPV? Hint: operating cash flow amounts are constant from year 1 to year 4.

A) $16,522

B) $25,002

C) $27,550

D) $16,196

E) $26,848