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 $23.00 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 $1.35 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.76 million per year and cost $2.28 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 21.00%. The WACC is 12.00%. Find the NPV (net present value).

Please show work ( NOT ON EXCEL)

Answer 1

Annual Operating cashflows
Annual revenue			8760000
Lless: Annual cost			2280000
Less: Depreciation (23-)/10			2200000
Before tax income			4280000
Less: Tax @ 21%			898800
After Tax Income			3381200
Add: Depreciation			2200000
Annual Cashflows			5581200
Multiply: Annuity PVF at 12% for 10yrs			5.65022
Present value of cashflows				31535007.9
Present value of Salvage (1000000*0.321973)				321973
Present Value of WC release (1350000*0.321973)				434663.55
Total Inflows				32291644.4
Less: Total Investment (23000000+1350000)				24350000
NPV				7941644.41