Question
Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below. The equipment to be used would be depreciated by
Weston Clothing 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 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 Weston's 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 3 years $67,500 Annual operating
Weston Clothing 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 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 Weston's 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 3 years | $67,500 |
Annual operating costs (excl. deprec.) | $25,000 |
Tax rate | 35.0% |
Question 10 options:
$3,636 | |
$3,828 | |
$4,019 |
costs (excl. deprec.) $25,000 Tax rate 35.0% Question 10 options: $3,636 $3,828 $4,019
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