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Homework answers / question archive / Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below

Weston Clothing Company is considering manufacturing a new style of shirt, whose data are shown below

Finance

Weston Clothing Company is considering manufacturing a new style of shirt, 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 Weston's 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.)

 

 

Cost of capital 10.0%

Pre-tax cash flow reduction for other products (cannibalization) $5,000

Investment cost (depreciable basis) $80,000

Straight-line deprec. rate 33.333%

Sales revenues, each year for 3 years $67,500

Annual operating costs (excl. deprec.) $25,000

Tax rate 25.0%

 

 

a. $6,196

 

b.  $6,522

 

c. $6,848

 

d. $7,190

 

e.  $7,550

 

 

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