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 $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 diet drink will produce revenues of $8.85 million per year and cost $1.91 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 33.00%. The WACC is 12.00%. Find the IRR (internal rate of return).

Submit

Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

IRR=11.26%

Workings

Incremental profit = (revenue-cost)*(1-Switching customers)

= (8850000-1910000)*(1-15%)

= 5899000

Incremental profit after tax = 5899000*(1-33%) = 3952330

Year	Initial cost	Tax shield	Salvage	Net workings capital	Incremental profit after tax	Net Cash flows
0	-28000000			-1310000		-29310000
1		825000			3952330	4777330
2		825000			3952330	4777330
3		825000			3952330	4777330
4		825000			3952330	4777330
5		825000			3952330	4777330
6		825000			3952330	4777330
7		825000			3952330	4777330
8		825000			3952330	4777330
9		825000			3952330	4777330
10		825000	3000000	1310000	3952330	9087330

Book1- Excel AutoSave Off Sign in Share View O Tell me what you want to do File Review Help Comments Home Insert Draw Page Layout Formulas Data Insert A^ A General Calibri 11 Delete Conditional Format as Cell Sort & Find & Paste В I U Format Filter Select Formatting Table Styles Styles Clipboard Alignment Number Cells Editing Font fix СЗ -28000000 A В C D E F 1 Year Initial cost Tax shield Salvage Net workings capital Incremental profit after tax Net Cash flows SUM(C3:G3) 2 -28000000 3 0 -1310000 33%*(28000000-3000000)/10 33%* (280000000-3000000)/10 33%*(28000000-3000000)/10 33%*(28000000-3000000)/10 =33%*(28000000-3000000)/10 =33%*(28000000-3000000)/10 33%*(28000000-3000000)/10 33%*(28000000-3000000)/10 -33%*(28000000-3000000)/10 33%* (28000000-3000000)/10 3000000 -F3 =5899000* (1-33%) =5899000* (1-33%) 5899000*(1-33%) 5899000*(1-33%) =5899000* (1-33%) =5899000* (1-33%) 5899000*(1-33%) =5899000* (1-33%) =5899000* (1-33%) =5899000* (1-33%) =SUM(C4:G4) SUM(C5:G5) SUM(C6:G6) =sUM(C7:G7) =sUM(C8:G8) =SUM(C9:G9) =SUM(C10:G10) =SUM(C11:G11) =SUM(C12:G12) 4 1 5 2 6 3 7 4 5 9 6 10 7 11 12 9 =SUM(C13:G13) 13 10 14 =IRR(H3:H13) 15 IRR 16 17