Yummy Foods is considering a new salsa product
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Yummy Foods is considering a new salsa product whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight line method over the project's 3-year life, would have 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 Yummy 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%
Annual pre-tax cannibalization cost $5,000
Net investment cost (depreciable basis) $65,000
Straight line depr'n rate 33.33%
Sales revenues $70,000
Operating costs excl. depr'n $25,000
Tax rate 35%
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Solution Summary
The solution examines Yummy Foods considering a new salsa product. The projects NPV is provided.
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