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 project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0. At the end of the project's 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. 10.0% -$5,000 $80,000 $55,000 -$25,000 25.0% WACC Pre-tax cash flow reduction for other products (cannibalization) Equipment cost Annual sales revenues Annual operating costs Tax rate O a. -$13,848 O b. -$14,152 O C. -$14,303 O d. -$13,372 O e. -$14,253

Answer 1

Depreci After-tax Working Net cash PVIF@ Depreci Tax@25 Net Year Revenue flow 10% Present value Costs ation PBT income ation OCF capital Investment (60,000) $ (60,000)| 1.000 $ $ 18,750 $ 18,750 $ 18,750 (60,000.00) 17,045.45 $ 18,750 $ $ 18,750 $ $ 18,750 $ $ 25,000 $ 6,250 $ 18,750 $ $ 25,000 $ 6,250 $ 18,750 $ $ 25,000 $ 6,250 $ 18,750S 1 $55,000 $30,000 $ - 2 $ 55,000 $30,000 $ 3 $55,000 $30,000 $ - 0.909 $ 0.826 $ 0.751 $ 15,495.87 14,087.15 -$13,372 Net present value $ 60,000 Asset cost Less: Depreciation charged WDV at the time of sale Sale value of machine Profit/(Loss) on sale Less: Tax @ 25% After tax cash salvage value $ 228,750 $ 60,000 $ 285,000 $ 225,000 $ 56,250

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