Question

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $24.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.26 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.56 million per year and cost $1.91 million per year over the 10-year life of the project. Marketing estimates 12.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 24.00%. The WACC is 14.00%. Find the NPV (net present value).

Answer 1

NOTE:please follow the step wise solution.In step 3,no tax is deducted from the salvage value as sale value is same as book value and hence no question of capital gain tax arises.Further the estimation of marketing that 12.00% of the buyers of the diet drink will be people who will switch from the regular drink is not relevant here as inflow lost from regular drink is not given and so no annual opportunity cost can be deducted from the annual cash inflow of the diet drink.