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unanswered not_submitted Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the

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Answer #1
Profit = (revenues-sales)*(1-switch%)
=(8690000-1860000)*(1-0.14)
5873800
Time line 0 1 2 3 4 5 6 7 8 9 10
Cost of new machine -26000000
Initial working capital -1190000
=Initial Investment outlay -27190000
100.00%
Profits 5873800 5873800 5873800 5873800 5873800 5873800 5873800 5873800 5873800 5873800
-Depreciation (Cost of equipment-salvage value)/no. of years -2500000 -2500000 -2500000 -2500000 -2500000 -2500000 -2500000 -2500000 -2500000 -2500000 1000000 =Salvage Value
=Pretax cash flows 3373800 3373800 3373800 3373800 3373800 3373800 3373800 3373800 3373800 3373800
-taxes =(Pretax cash flows)*(1-tax) 2496612 2496612 2496612 2496612 2496612 2496612 2496612 2496612 2496612 2496612
+Depreciation 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000 2500000
=after tax operating cash flow 4996612 4996612 4996612 4996612 4996612 4996612 4996612 4996612 4996612 4996612
reversal of working capital 1190000
+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 2190000
Total Cash flow for the period -27190000 4996612 4996612 4996612 4996612 4996612 4996612 4996612 4996612 4996612 7186612
Discount factor= (1+discount rate)^corresponding period 1 1.127125311 1.270411467 1.43191292 1.6139453 1.8191186 2.0503746 2.31102912 2.6048194 2.935958 3.309192
Discounted CF= Cashflow/discount factor -27190000 4433058.109 3933065.885 3489466.385 3095899.2 2746721.4 2436926.4 2162072.281 1918218.2 1701868 2171712
NPV= Sum of discounted CF= 899007.34
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