Question
TexMex Food Company is considering a new salsa whose data are shown below. Under the new tax law, the equipment to be used in the
TexMex Food Company is considering a new salsa whose data are shown below. Under the new tax law, the equipment to be used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the projects life, the equipment would have zero salvage value, and no change in net operating working capital (NOWC) would be required for the project. Revenues and 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) $3,000
Equipment cost $186,000
Annual sales revenues $70,500
Annual operating costs $25,000
Tax rate 25.0%
a. -$106,732 b. -$60,232 c. -$47,550 d. -$31,322 e. -$52,305
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