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"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 $25.00 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 $1.41 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.12 million per year and cost $1.88 million per year over the 10-year life of the project. Marketing estimates 16.00% 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 14.00%. Find the NPV (net present value)." Round to 2 decimal places

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Answer #1
Profit = (revenues-sales)*(1-switch%)
=(9120000-1880000)*(1-0.16)
6081600
Time line 0 1 2 3 4 5 6 7 8 9 10
Cost of new machine -25000000
Initial working capital -1410000
=Initial Investment outlay -26410000
100.00%
Profits 6081600 6081600 6081600 6081600 6081600 6081600 6081600 6081600 6081600 6081600
-Depreciation (Cost of equipment-salvage value)/no. of years -2400000 -2400000 -2400000 -2400000 -2400000 -2400000 -2400000 -2400000 -2400000 -2400000 1000000 =Salvage Value
=Pretax cash flows 3681600 3681600 3681600 3681600 3681600 3681600 3681600 3681600 3681600 3681600
-taxes =(Pretax cash flows)*(1-tax) 2724384 2724384 2724384 2724384 2724384 2724384 2724384 2724384 2724384 2724384
+Depreciation 2400000 2400000 2400000 2400000 2400000 2400000 2400000 2400000 2400000 2400000
=after tax operating cash flow 5124384 5124384 5124384 5124384 5124384 5124384 5124384 5124384 5124384 5124384
reversal of working capital 1410000
+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 2410000
Total Cash flow for the period -26410000 5124384 5124384 5124384 5124384 5124384 5124384 5124384 5124384 5124384 7534384
Discount factor= (1+discount rate)^corresponding period 1 1.14 1.2996 1.481544 1.6889602 1.9254146 2.1949726 2.502268791 2.8525864 3.251949 3.707221
Discounted CF= Cashflow/discount factor -26410000 4495073.684 3943047.091 3458813.238 3034046.7 2661444.5 2334600.4 2047895.101 1796399.2 1575789 2032353
NPV= Sum of discounted CF= 969462.14
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