Weston Clothing Company Is Considering Manufacturing a New Style of Shirt,whose

Multiple Choice

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.) $$\begin{array} { l r } \text { WACC } & 10.0 \% \\\text { Pre-tax cash flow reduction for other products (cannibalization) } & \$ 5,000 \\\text { Investment cost (depreciable basis) } & \$ 80,000 \\\text { Straight-line deprec. rate } & 33.333 \% \\\text { Sales revenues, each year for } 3 \text { years } & \$ 67,500 \\\text { Annual operating costs (excl. deprec.) } & \$ 25,000 \\\text { Tax rate } & 35.0 \%\end{array}$$

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