Question
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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 $23.00 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 $1.46 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.03 million per year and cost $1.93 million per year over the 10-year life of the project. Marketing estimates 17.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 22.00%. The WACC is 14.00%. Find the NPV (net present value). Answer Format: Currency: Round to: 2 decimal places.
Solutions
Expert Solution
| Calculation of NPV | ||||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Plant Expansion and purchase cost of equipment | -$23,000,000.00 | |||||||||||
| Sale value of equipment | $2,000,000.00 | |||||||||||
| Investment in Net working capital | -$1,460,000.00 | |||||||||||
| Recovery of net working capital | $1,460,000.00 | |||||||||||
| Operating Cash flow | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | ||
| Net Cash flow | -$24,460,000.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $4,802,622.00 | $8,262,622.00 | |
| x Discount factor @ 14% | 1 | 0.877192982 | 0.769467528 | 0.674971516 | 0.592080277 | 0.519368664 | 0.455586548 | 0.399637323 | 0.350559055 | 0.307507943 | 0.26974381 | |
| Present Value | -$24,460,000.00 | $4,212,826.32 | $3,695,461.68 | $3,241,633.05 | $2,843,537.77 | $2,494,331.37 | $2,188,009.98 | $1,919,307.00 | $1,683,602.63 | $1,476,844.41 | $2,228,791.13 | |
| Net Present Value (NPV) | $1,524,345.34 | |||||||||||
| Working | ||||||||||||
| Operating Cash flow per year | ||||||||||||
| Revenue from diet drink | $9,030,000.00 | |||||||||||
| Less : Buyers swith from regular drink (17% of $9.03 million) | $1,535,100.00 | |||||||||||
| Increase in Sales | $7,494,900.00 | |||||||||||
| Less : Costs | $1,930,000.00 | |||||||||||
| Less : Depreciation | $2,100,000.00 | |||||||||||
| Profit before tax | $3,464,900.00 | |||||||||||
| Less : Tax @ 22% | $762,278.00 | |||||||||||
| Add : Depreciation | $2,100,000.00 | |||||||||||
| Operating Cash flow per year | $4,802,622.00 | |||||||||||
| Depreciation per year = [Cost - Book value at the end] / useful life = [$23 million - $2 million]/10 years = $2.10 million | ||||||||||||
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plant and equipment will be depreciated over 10 years to a book
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plant and equipment will be depreciated over 10 years to a book
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