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 $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.12 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.48 million per year and cost $2.33 million per year over the 10-year life of the project. Marketing estimates 14.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 34.00%. The WACC is 12.00%. Find the NPV (net present value)

(Can you please show how to find answer thank you)

Answer 1

Solution :

The Net Present Value = $ 4,939,599.16

= $ 4,939,599 ( when rounded off to the nearest dollar )

Note :

Calculation of Annual Depreciation as per straighline method :

The formula for calculation of the annual depreciation as per straight line method of depreciation is

Annual depreciation = ( Cost of the equipment - Book value at end of depreciable life ) / No. of years of depreciable life  

As per the information given in the question we have

Cost of the equipment = $ 26,000,000 ; Book value at end of depreciable life = $ 2,000,000 ;

No. of years of depreciable life = 10 years

Applying the above information in the formula we have

= ( $ 26,000,000 - $ 2,000,000 ) / 10

= $ 24,000,000 / 10 = $ 2,400,000

Thus the Annual depreciation as per the straight line method is = $ 2,400,000

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.