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    Calculating NPV in the given case

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    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 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 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) -$5,000
    Investment cost (depreciable basis) $80,000
    Straight-line depr. rate 33.333%
    Sales revenues, each year for 3 years $73,500
    Annual operating costs (excl. depr.) -$25,000
    Tax rate 35.0%

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    Solution Preview

    Please refer attached file for better clarity of tables.

    Solution:
    Initial Investment=Co=80,000.00
    Salvage Value=S=0.00
    Useful Life=n=3 years
    Depreciation per year=(Co-S)/n=26,666.67

    Sales Revenue per year=73,500.00
    Operating ...

    Solution Summary

    Solution describes the steps to calculate NPV in the given case.

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