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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 $25.00 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 $1.11 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.88 million per year and cost $1.81 million per year over the 10-year life of the project. Marketing estimates 20.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 33.00%. The WACC is 12.00%. Find the NPV (net present value).


Solutions

Expert Solution

NPV 455973.34
Year Working capital Cost of new
machine		 Tax shield-
depreciation		 Sale of new
machine		 (Sales-cost)
*(1-Erosion%)*(1-Tax rate)		 Net CF
0 -1110000 -25000000 -26110000
1 792000 3789520 4581520
2 792000 3789520 4581520
3 792000 3789520 4581520
4 792000 3789520 4581520
5 792000 3789520 4581520
6 792000 3789520 4581520
7 792000 3789520 4581520
8 792000 3789520 4581520
9 792000 3789520 4581520
10 1110000 792000 1000000 3789520 6691520

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jeff jeffy answered 6 months ago
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