TexMex Food Company Is Considering a New Salsa Whose Data

question 40

Multiple Choice

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 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 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.)
WAAC = 10%
Pre tax cash flow reduction for other products(cannibalization) = $5,000
Investment costs(depreciable basis) = $80,000
Straight line depr rate = 33.333%
Sales revenues, each for 3 years = $67,500
Annual operating costs (excl deprec) = $25,000
Tax rate = 35.0%

• A)$3,636
• B)$3,828
• C)$4,019
• D)$4,220
• E)$4,431

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Definitions:

Expected Return

The predicted amount of profit or loss an investment is expected to generate over a specific time period.

Probability Distribution

A mathematical formulation that presents all potential values and their chances for a random variable within a particular range.

Real Rate of Return

The annual percentage profit earned on an investment, adjusted for changes in the price level due to inflation or deflation.

Annual Interest Rate

The percentage increase in money per year when it is lent or invested, excluding the effects of compounding.