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 3-year life and would have a zero salvage value, and no change in net operating 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 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) -$5,000Investment cost (depreciable basis) $80,000Straight-line depreciation rate 33.333%Annual sales revenues $67,500Annual operating costs (excl. depreciation) -$25,000Tax rate 35.0%a. $3,636b. $3,828c. $4,019d. $4,220e. $4,431

net cash flows years 1 - 3 = [(revenue - operating expense - depreciation - cannibalization) x (1 - tax rate)] + depreciation = [($67,500 - $25,000 - $26,666.67 - $5,000) x 0.65] + $26,666.67 = $33,708.33

NPV = -$80,000 + $33,708.33/1.1 + $33,708.33/1.1² + $33,708.33/1.1³ = -$80,000 + $30,643.94 + $27,858.12 + $25,325.57 = $3,827.63 ≈ $3,828

Answer Link

topeadeniran2 topeadeniran2 · Answer 2 · 2021-11-25T14:17:31+01:00

Based on the information given, the project's NPV will be $3,828.

The net present value is simply used in the estimation of the current value of the future cash flows that are generated by a project.

Based on the information given, the net cash flows from the first to the third year will be:

= [($67,500 - $25,000 - $26,666.67 - $5,000) x 0.65] + $26,666.67

= $33,708.33

Therefore, the NPV will be:

= -$80,000 + $33,708.33/1.1 + $33,708.33/1.1² + $33,708.33/1.1³

= -$80,000 + $30,643.94 + $27,858.12 + $25,325.57

= $3,827.63 ≈ $3,828

Therefore, the NPV is $3,828.

Read related link on:

https://brainly.com/question/19409530