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 $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.39 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.50 million per year and cost $2.39 million per year over the 10-year life of the project. Marketing estimates 11.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 29.00%. The WACC is 13.00%. Find the NPV (net present value).

Answer format: Currency: Round to: 2 decimal places.

Just wanted to make I'm doing the process correctly. thanks

Answer 1

NPV

158057.40

Year	Sale of old machine	Cost of new machine	Tax shield- depreciation	Sale of new machine	(Sales-cost)*(1-old customers) after tax	Net CF
0	-1390000	-24000000				-25390000
1			609000		3860909	4469909
2			609000		3860909	4469909
3			609000		3860909	4469909
4			609000		3860909	4469909
5			609000		3860909	4469909
6			609000		3860909	4469909
7			609000		3860909	4469909
8			609000		3860909	4469909
9			609000		3860909	4469909
10	1390000		609000	3000000	3860909	8859909
					NPV	158057.40

Workings