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 $22.00 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 $1.48 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.41 million per year and cost $2.18 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 35.00%. The WACC is 13.00%. Find the NPV (net present value).

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

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#3

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 $1.13 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.43 million per year and cost $1.86 million per year over the 10-year life of the project. Marketing estimates 19.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 32.00%. The WACC is 13.00%. Find the IRR (internal rate of return).

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Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

NPV	3888763.18

Workings

Incremental profit = (Sales-Cost)*(1- Erosion percentage)*(1- tax rate).

No tax impact on sale of machine since it is sold at book value.

Year	Working capital	Cost of new machine	Tax shield- depreciation	Sale of new machine	Incremental (Sales-cost) after tax	Net CF
0	-1480000	-22000000				-23480000
1			665000		4135560	4800560
2			665000		4135560	4800560
3			665000		4135560	4800560
4			665000		4135560	4800560
5			665000		4135560	4800560
6			665000		4135560	4800560
7			665000		4135560	4800560
8			665000		4135560	4800560
9			665000		4135560	4800560
10	1480000		665000	3000000	4135560	9280560

PART 2

IRR

14.19%

Year	Working capital	Cost of new machine	Tax shield- depreciation	Sale of new machine	Incremental (Sales-cost) after tax	Net CF
0	-1130000	-2.5E+07				-26130000
1			768000		4169556	4937556
2			768000		4169556	4937556
3			768000		4169556	4937556
4			768000		4169556	4937556
5			768000		4169556	4937556
6			768000		4169556	4937556
7			768000		4169556	4937556
8			768000		4169556	4937556
9			768000		4169556	4937556
10	1130000		768000	1000000	4169556	7067556