Doritos Inc. is considering producing a new flavour for its nacho chips with the following data after
Question:
Doritos Inc. is considering producing a new flavour for its nacho chips with the following data after their extensive research. The equipment has a constant capital cost allowance over its 3-year life with a zero salvage value. An initial working capital investment of $16,000 would be required but there are no additional working capital investment required in each of the following years. Revenues and cash operating costs are expected to remain constant each year over the project’s 3-year life. However, this project would compete with other Doritos products and would reduce the company’s pre-tax annual cash flows. What is the project’s NPV?
WACC: 15.0%
Pre-tax cash flow reduction in other products (cannibalization): $8,000
Investment cost: $90,000
Marketing survey conducted last year: $12,000
Annual sales revenues: $83,000
Annual cash operating costs: $40,000
Tax rate: 30.0%
You must show all calculation steps, providing a final answer only will not get you full marks.
Expert Answer:
