Question

International energy drink giant Energica Turkey’s regional sales manager Hakan Çokbilir investigate the plans for the Middle East and plans to launch in Azerbaijan in 2021. The market price of the Company’s plant in Turkey is determined to be $ 5 million. It causes the company to need a capital of $ 20 million in 2021 to shift the investment to Azerbaijan and to establish a new bottling factory and distribution channel. While the fixed expenses required for production, distribution and marketing as of 2021 are $ 3 million per year, 50 million liters of energy drink will be produced in the country at the end of each year. Variable costs arising from production and distribution will be 12 Cent per liter. According to the policy pursued, the expected minimum return rate of the company is accepted as 6%. The income from sales is expected to be 35 cents per liter. Bottling factories are expected to serve almost forever, so all unit costs and sales revenues are expected to remain constant forever. The company will be subject to a 30% tax tranche in accordance with the Azerbaijan tax law and capital investments will be eliminated with equal shares within 5 years. Do you think the company should make this investment? Why?

Answer 1

Calculating present value of cashflows ( all amounts in $"000" )

Particulars 0 1 2 3 4 5

Sales (50M *0.35 cents) 17500 17500 17500 17500 17500

Variable cost(50M*0.12 cents) (6000) (6000) (6000)    (6000)    (6000)

Fixed expenses (3000)   (3000)    (3000) (3000) (3000)

Operating profit 8500 8500 8500 8500 8500

Tax (O/P * 0.30) (2550)     (2550) (2550) (2550)   (2550)

Profit After Tax 5950 5950 5950 5950 5950

Cost of Plant (5000)

Capital (20000)

Cashflows (25000) 5950 5950 5950 5950 5950

DF@6% 1 0.94 0.89 0.84 0.79 0.75

present values (25000) 5593 5296 4998 4701 4463

Net Present Value = PV of cash inflows - PV of cash outflows

= 25051 - 25000

= 51 i.e..$ 51000

So project should be acceptable as cashflows are positive .

Note :

cashflows will be foreever so 5th year cashflows are 5950/6% = $991667000 But we are replacing capital with equity it will not include in our project.so company will get equity amouny at the end of the 5th year as this is a cash inflow need to be considered .