TexMex Food Company is considering a new salsa whose data are shown below. Under the new...

 

Transcribed Image Text:

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 = o. 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. WACC Pre-tax cash flow reduction for other products (cannibalization) Equipment cost Annual sales revenues Annual operating costs 10.0% $4,000 $150,000 $67,500 $25,000 Tax rate 25.0% 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 = o. 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. WACC Pre-tax cash flow reduction for other products (cannibalization) Equipment cost Annual sales revenues Annual operating costs 10.0% $4,000 $150,000 $67,500 $25,000 Tax rate 25.0%

Answer rating: 100% (QA)

To calculate the net present value NPV of the project we need to determine the annual cash flows for ... View the full answer