TexMex Food Company Is Considering a New Salsa Whose Data

question 22

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 change in net operating 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. ) Do not round the intermediate calculations and round the final answer to the nearest whole number.
? $$\begin{array} { l r } \text { WACC } & 10.0 \% \\\text { Pre-tax cash flow reduction for other products (cannibalization) } & - \$ 5,000 \\\text { Investment cost (depreciable basis) } & \$ 80,000 \\\text { Straight-line depr. rate } & 33.333 \% \\\text { Annual sales revenues } & \$ 66,000 \\\text { Annual operating costs (excl. depr.) } & - \$ 25,000 \\\text { Tax rate } & 35.0 \%\end{array}$$
?

• A) 01,529
• B) 01,094
• C) 01,403
• D) 01,347
• E) 01,684

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Definitions:

Sherman Act

A landmark federal statute in the field of United States antitrust law passed in 1890 that prohibits monopolistic practices and promotes competition.

Antitrust Laws

Legislation intended to promote competition and prevent monopolies and unfair business practices.

Competitive Economy

An economic system where many firms compete to sell their goods and services, with minimal barriers to entry and exit.

Elasticity Of Demand

An indicator of the sensitivity of demand for a product to fluctuations in its price.