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 diet drink will produce revenues of $8.84 million per year and cost $1.50 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 28.00%. The WACC is 14.00%. 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))
Profit = (revenues-sales)*(1-switch%) |
=(8840000-1500000)*(1-0.1) |
=6606000 |
Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
Cost of new machine | -26000000 | |||||||||||
Initial working capital | -1290000 | |||||||||||
=Initial Investment outlay | -27290000 | |||||||||||
Profits | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | 6606000 | ||
-Depreciation | (Cost of equipment-salvage value)/no. of years | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | -2500000 | |
=Pretax cash flows | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | 4106000 | ||
-taxes | =(Pretax cash flows)*(1-tax) | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | 2956320 | |
+Depreciation | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | 2500000 | ||
=after tax operating cash flow | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | ||
reversal of working capital | 1290000 | |||||||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 720000 | ||||||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 280000 | ||||||||||
=Terminal year after tax cash flows | 2290000 | |||||||||||
Total Cash flow for the period | -27290000 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 5456320 | 7746320 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.156157083 | 1.3366992 | 1.545434248 | 1.7867648 | 2.0657807 | 2.388367 | 2.76132744 | 3.1925283 | 3.691064 | 4.26745 |
Discounted CF= | Cashflow/discount factor | -27290000 | 4719358.711 | 4081935.561 | 3530606.37 | 3053742.8 | 2641287.1 | 2284540 | 1975977.177 | 1709090.6 | 1478251 | 1815210 |
NPV= | Sum of discounted CF= | 0.00 | ||||||||||
IRR is discount rate at which NPV = 0 = | 16.0000% |
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 $27.00 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 $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...
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