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 $28.00 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 $1.38 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.97 million per year and cost $1.68 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 32.00%. The WACC is 11.00%. Find the NPV (net present value).
Initial Investment = $28,000,000
Salvage Value = $1,000,000
Useful Life = 10 years
Annual Depreciation = (Initial Investment - Salvage Value) /
Useful Life
Annual Depreciation = ($28,000,000 - $1,000,000) / 10
Annual Depreciation = $2,700,000
Initial Investment in NWC = $1,380,000
Salvage Value = $1,000,000
Annual Operating Cash Flow = (Sales - Costs) * (1 - tax) + tax *
Depreciation
Annual Operating Cash Flow = ($8,970,000 - $1,680,000) * (1 - 0.32)
+ 0.32 * $2,700,000
Annual Operating Cash Flow = $7,290,000 * 0.68 + 0.32 *
$2,700,000
Annual Operating Cash Flow = $5,821,200
WACC = 11.00%
NPV = -$28,000,000 - $1,380,000 + $5,821,200 * PVA of $1
(11.00%, 10) + $1,380,000 * PV of $1 (11.00%, 10) + $1,000,000 * PV
of $1 (11.00%, 10)
NPV = -$28,000,000 - $1,380,000 + $5,821,200 * 5.88923 + $1,380,000
* 0.35218 + $1,000,000 * 0.35218
NPV = $5,740,574
So, NPV of the project is $5,740,574
Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant...
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