"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 diet drink will produce revenues of $9.23 million per year and cost $2.12 million per year over the 10-year life of the project. Marketing estimates 17.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 25.00%. The WACC is 15.00%. Find the IRR (internal rate of return)."
4 decimal places and % sign required
Profit = (revenues-cost)*(1-%age that swtiched) |
=(9230000-2120000)*(1-0.17) =5901300 |
Time line | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | |
Cost of new machine | -22000000 | |||||||||||
Initial working capital | -1070000 | |||||||||||
=Initial Investment outlay | -23070000 | |||||||||||
Profits | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | 5901300 | ||
-Depreciation | (Cost of equipment-salvage value)/no. of years | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | -2100000 | |
=Pretax cash flows | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | 3801300 | ||
-taxes | =(Pretax cash flows)*(1-tax) | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | 2850975 | |
+Depreciation | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | 2100000 | ||
=after tax operating cash flow | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | ||
reversal of working capital | 1070000 | |||||||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 750000 | ||||||||||
+Tax shield on salvage book value | =Salvage value * tax rate | 250000 | ||||||||||
=Terminal year after tax cash flows | 2070000 | |||||||||||
Total Cash flow for the period | -23070000 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 4950975 | 7020975 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.174929515 | 1.380459365 | 1.621942452 | 1.9056681 | 2.2390256 | 2.6306973 | 3.090883924 | 3.6315707 | 4.26684 | 5.013236 |
Discounted CF= | Cashflow/discount factor | -23070000 | 4213848.522 | 3586469.204 | 3052497.327 | 2598025.9 | 2211218.5 | 1882001 | 1601799.072 | 1363315 | 1160338 | 1400488 |
NPV= | Sum of discounted CF= | 0.00 | ||||||||||
IRR is discount rate at which NPV = 0 = | 17.4930% |
"Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant...
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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 $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 $1.46 million at the beginning of the project and will be recovered at the end. The new...
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