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Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant...

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

Solutions

Expert Solution

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

jeff jeffy answered 5 months ago
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