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 $1.48 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.85 million per year and cost $2.03 million per year over the 10-year life of the project. Marketing estimates 15.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 26.00%. The WACC is 15.00%. Find the IRR (internal rate of return).
| Profit = (revenues-sales)*(1-switch%) |
| =(8850000-2030000)*(1-0.15) |
| =5797000 |
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
| Cost of new machine | -23000000 | |||||||||||
| Initial working capital | -1480000 | |||||||||||
| =Initial Investment outlay | -24480000 | |||||||||||
| Profits | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | 5797000 | ||
| -Depreciation | (Cost of equipment-salvage value)/no. of years | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | -2200000 | |
| =Pretax cash flows | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | 3597000 | ||
| -taxes | =(Pretax cash flows)*(1-tax) | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | 2661780 | |
| +Depreciation | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | 2200000 | ||
| =after tax operating cash flow | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | ||
| reversal of working capital | 1480000 | |||||||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 740000 | ||||||||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 260000 | ||||||||||
| =Terminal year after tax cash flows | 2480000 | |||||||||||
| Total Cash flow for the period | -24480000 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 4861780 | 7341780 | |
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.155517425 | 1.335220519 | 1.542870576 | 1.7828138 | 2.0600725 | 2.3804496 | 2.750651009 | 3.1784252 | 3.672726 | 4.243899 |
| Discounted CF= | Cashflow/discount factor | -24480000 | 4207448.451 | 3641181.31 | 3151126.268 | 2727026.2 | 2360004.4 | 2042378.9 | 1767501.578 | 1529619.1 | 1323753 | 1729961 |
| NPV= | Sum of discounted CF= | 0.00 | ||||||||||
| IRR is discount rate at which NPV = 0 = | 15.5517% | |||||||||||
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 $24.00 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 $1.34 million at the beginning of the project and will be recovered at the end. The new...
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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 $27.00 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 $1.35 million at the beginning of the project and will be recovered at the end. The new...
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 $1.07 million at the beginning of the project and will be recovered at the end. The new...
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 $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.31 million at the beginning of the project and will be recovered at the end. The new...
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 $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.31 million at the beginning of the project and will be recovered at the end. The new...
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 $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.29 million at the beginning of the project and will be recovered at the end. The new...
"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 $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.07 million at the beginning of the project and will be recovered at the end. The new...
"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 $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.07 million at the beginning of the project and will be recovered at the end. The new...
1. 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 $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.23 million at the beginning of the project and will be recovered at the end. The...