TexMex Food Company is considering a new salsa whose data are shown below. The equipment to be

Question:

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 , 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?
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%

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...