Find the NPV the new project (Zero Calories Drink) after you do table for cash f

Question

Find the NPV the new project (Zero Calories Drink) after you do table for cash flow 5 years

Hola Kola Project life 5 years Banck loan 5 years loan Annual intrest 16% dabt in capita 20% equity in capital 80% Weighted Average Cost Of Capital 18.2% The estimated sales of Zero-Carbonates by the consultant per month 600,000 liters price per liter 5 pesos This volume of Sales at the same price till 5 years Cost of the market study 5,000,000 pesos Cost of the machines + installation 50,000,000 pesos Depreciation in straight in next five years/per year 10,000,000 pesos Cost of the Lease per year 60,000 pesos Proposed number of inventory days 30 Proposed number of collection days 45 Proposed number of payable days 36 Working capital days 39 Raw material needed for each litre of Sodas 1.8 pesos Labor Cost per month 180000 pesos Energy Cost per month 50000 pesos Incremental General + Administrative Expenses Per Year 300000 pesos Overhead cost on new product launch 1% Existing erosion            800,000 Existing Tax Rate 30% Salvage Value 4,000,000

Explanation / Answer

To determine the NPV, we need to calculate the net annual cash flows.

NPV is the difference between the value of cash inflows and cash outflows. The formula for calculating NPV is given below:

NPV = Cash Flow Year 0 + Cash Flow Year 1/(1+WACC)^1 + Cash Flow Year 2/(1+WACC)^2 + Cash Flow Year3/(1+WACC)^3 + Cash Flow Year 4/(1+WACC)^4 + Cash Flow Year 5/(1+WACC)^5

Using the values calculated in the above table, we get,

NPV = -50,000,000 + 20,841,425/(1+18.2%)^1 + 20,841,425/(1+18.2%)^2 + 20,841,425/(1+18.2%)^3 + 20,841,425/(1+18.2%)^4 + 32,874,301/(1+18.2%)^5 = 20,095,873

__________

Notes/Assumptions:

1) Interest is added back for calculating Net Cash Flows.

2) Working capital each year is calculated as follows = 36,000,000/365*39 = 3,846,575

3) Working capital is assumed to be constant each year and the entire amount of working capital is assumed to be recovered at the end of the project.

4) Cost of the market study is a sunk cost and will therefore, not be included in the cost.

Year 0 1 2 3 4 5 Sales Revenue (600,000*12*5) 36,000,000 36,000,000 36,000,000 36,000,000 36,000,000 Less: Cost Of Raw Material (600,000*1.8) 1,080,000 1,080,000 1,080,000 1,080,000 1,080,000 Less: Labour Cost (180,000*12) 2,160,000 2,160,000 2,160,000 2,160,000 2,160,000 Less: Energy Cost (50,000*12) 600,000 600,000 600,000 600,000 600,000 Less: Incremental General & Administrative Expenses 300,000 300,000 300,000 300,000 300,000 Less: Overhead Cost On New Product Launch 360,000 360,000 360,000 360,000 360,000 Less: Cost of Lease 60,000 60,000 60,000 60,000 60,000 Less: Interest on Term Loan (50,000,000*20%*16%) 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 Less: Depreciation (50,000,000/5) 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 Profit Before Tax (PBT) 19,840,000 19,840,000 19,840,000 19,840,000 19,840,000 Less: Taxation (@30%) 5,952,000 5,952,000 5,952,000 5,952,000 5,952,000 Net Profit After Tax 13,888,000 13,888,000 13,888,000 13,888,000 13,888,000 Add: Depreciation 10,000,000 10,000,000 10,000,000 10,000,000 10,000,000 Add: Interest 1,600,000 1,600,000 1,600,000 1,600,000 1,600,000 Cost of the Machine -50,000,000 Salvage Value 4,000,000 Less: Tax on Capital Gain (400,000*30%) (1,200,000) Introduction of Working Capital (3,846,575) (3,846,575) (3,846,575) (3,846,575) (3,846,575) Less: Working Capital Recovery at the End of Project $19,232,877 Less: Repayment of Term Loan $(10,000,000) Less: Existing Erosion (800,000) (800,000) (800,000) (800,000) (800,000) Net Cash Flows -50,000,000 $20,841,425 $20,841,425 $20,841,425 $20,841,425 $32,874,301

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