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 dietdrink. The expansion of the plant and the purchase of the equipmentnecessary to produce the diet drink will cost $23.00 million. Theplant and equipment will be depreciated over 10 years to a bookvalue of $2.00 million, and sold for that amount in year 10. Networking capital will increase by $1.46 million at the beginning ofthe project and will be recovered at the end. The new diet drinkwill produce revenues of $9.03 million per year and cost $1.93million per year over the 10-year life of the project. Marketingestimates 17.00% of the buyers of the diet drink will be people whowill switch from the regular drink. The marginal tax rate is22.00%. The WACC is 14.00%. Find the NPV (net present value).Answer Format: Currency: Round to: 2 decimalplaces.

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4.1 Ratings (505 Votes)

Calculation of NPV
Year	0	1	2	3	4	5	6	7	8	9	10
Plant Expansion and purchase cost of equipment	-$23,000,000.00
Sale value of equipment											$2,000,000.00
Investment in Net working capital	-$1,460,000.00
Recovery of net working capital											$1,460,000.00
Operating Cash flow		$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00
Net Cash flow	-$24,460,000.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$4,802,622.00	$8,262,622.00
x Discount factor @ 14%	1	0.877192982	0.769467528	0.674971516	0.592080277	0.519368664	0.455586548	0.399637323	0.350559055	0.307507943	0.26974381
Present Value	-$24,460,000.00	$4,212,826.32	$3,695,461.68	$3,241,633.05	$2,843,537.77	$2,494,331.37	$2,188,009.98	$1,919,307.00	$1,683,602.63	$1,476,844.41	$2,228,791.13
Net Present Value (NPV)	$1,524,345.34


Working
Operating Cash flow per year
Revenue from diet drink	$9,030,000.00
Less : Buyers swith from regular drink (17% of $9.03 million)	$1,535,100.00
Increase in Sales	$7,494,900.00
Less : Costs	$1,930,000.00
Less : Depreciation	$2,100,000.00
Profit before tax	$3,464,900.00
Less : Tax @ 22%	$762,278.00
Add : Depreciation	$2,100,000.00
Operating Cash flow per year	$4,802,622.00

Depreciation per year = [Cost - Book value at the end] / useful life = [$23 million - $2 million]/10 years = $2.10 million

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Caspian Sea Drinks is considering the production of a dietdrink. The expansion of the plant and the purchase of the equipmentnecessary to produce the diet drink will cost $23.00 million. Theplant and equipment will be depreciated over 10 years to a bookvalue of $2.00 million, and sold for that amount in year 10. Networking capital will increase by $1.46 million at the beginning ofthe project and will be recovered at the end. The new diet drinkwill produce revenues of $9.03 million per year and cost $1.93million per year over the 10-year life of the project. Marketingestimates 17.00% of the buyers of the diet drink will be people whowill switch from the regular drink. The marginal tax rate is22.00%. The WACC is 14.00%. Find the NPV (net present value).Answer Format: Currency: Round to: 2 decimalplaces.