NPV Analysis for Bottled Water Project

The assignment requires the application of NPV analysis to a bottled water project, taking into account various factors such as depreciation, target rate of return, projected cash inflows, and time value of money. The calculations yield positive NPV under best-case scenario but negative NPV in current and worst-case scenarios, informing a decision to accept or reject the project accordingly.

Running head: CORPORATE FINANCE
Corporate finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Answer a.....................................................................................................................................2
Answer b....................................................................................................................................3
Answer c.....................................................................................................................................5
Answer d....................................................................................................................................7
Reference....................................................................................................................................8

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Answer a.
Value of shares = 30,000,000 * $ 42 = $
Computation of weighted average cost of capital of CWC (Magni 2015)
Cost of equity –
Ke = Rf + β (Rm – Rf)
Where,
Ke = cost of equity
Rf = Risk free rate = 3.5%
Β = Beta = 2.639
Rm = Market return = 12.52%
Therefore,
Ke = 3.5 + 2.639 * (12.52 – 3.5)
= 3.5 + 23.8038 = 27.3038%
Therefore, Ke or cost of equity = 27.3038%
Cost of bond –
Annual interest rate = 10% * 2 = 20%
Maturity = 20 years
Present value = 50,00,000 * $ 92.34 = $ 46,17,00,000

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Face value = 50,00,000 * 100 = 50,00,00,000
Interest per year = 50,00,00,000 * 20% = $ 10,00,00,000
After tax interest = $ 10,00,00,000 * (1-0.34) = $ 660,00,000
Therefore, the effective rate = $ 660,00,000 / $ 50,00,00,000 = 0.132 or 13.20%
Cost of capital –
Amount Weightage Costs Weightage * Costs
Ordinary shares 1,260,000,000.00 0.7318 0.273 0.1998
Bonds 461,700,000.00 0.2682 0.132 0.0354
Total 1,721,700,000.00 1.0000 0.2352
Hence, weighted average cost of capital = 23.52%
Answer b.
Computation of depreciation –
Value of project = $ 30,00,000
Salvage value = Nil
Useful life = 3 years
Depreciation method = Straight line
Therefore, depreciation = $ 30,00,000 / 3 = $ 10,00,000 per year
Computation of cash flow
Particulars Units Amount
Sales (units) 1250000
Sales revenue (p.u) $ 1.25
Total sales revenue $ 1,562,500.00
Variable cost (p.u) $ 0.24

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Total variable cost $ 300,000.00
Contribution $ 1,262,500.00
Less: Fixed cost $ 200,000.00
Net income before tax $ 1,062,500.00
Less tax @ 34% $ 361,250.00
Net income after tax $ 701,250.00
Add: Depreciation $ 1,000,000.00
Cash flow $ 1,701,250.00
Calculation of NPV
Year 1 Year 2 Year 3
Cash flows before tax $ 1,062,500.00 $ 1,062,500.00 $ 1,062,500.00
Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Income before taxes $ 62,500.00 $ 62,500.00 $ 62,500.00
Taxes @ 34% $ 21,250.00 $ 21,250.00 $ 21,250.00
Net income after tax $ 41,250.00 $ 41,250.00 $ 41,250.00
Add: Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Cash flow after tax $ 1,041,250.00 $ 1,041,250.00 $ 1,041,250.00
After tax Terminal value $ 330,000.00
Net cash flow after tax $ 1,041,250.00 $ 1,041,250.00 $ 1,371,250.00
Discount rate @ 23.52% 0.810 0.656 0.531
Present value of cash
flows $ 843,117.41 $ 682,686.16 $ 727,973.83
Total $ 2,253,777.40
Net present value –
= Present value of cash flows – Initial investment
= $ 22,53,770.40 – $ 30,00,000 = - $ 746,222.60
It can be seen from the above calculation that the resultant NPV of project is in
negative that is - $ 746,222.60 (Žižlavský 2014). Therefore, CWC shall not accept the
proposed project of bottled water as per previously stated normal condition.

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Answer c.
Best – case scenario
Calculation of cash flow
Particulars Units Amount
Sales (units) 2,500,000.00
Sales revenue (p.u) $ 1.24
Total sales revenue $ 3,100,000.00
Variable cost (p.u) $ 0.22
Total variable cost $ 550,000.00
Contribution $ 2,550,000.00
Less: Fixed cost $ 200,000.00
Net income before tax $ 2,350,000.00
Calculation of NPV
Year 1 Year 2 Year 3
Cash flows before tax $ 2,350,000.00 $ 2,350,000.00 $ 2,350,000.00
Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Income before taxes $ 1,350,000.00 $ 1,350,000.00 $ 1,350,000.00
Taxes @ 34% $ 459,000.00 $ 459,000.00 $ 459,000.00
Net income after tax $ 891,000.00 $ 891,000.00 $ 891,000.00
Add: Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Cash flow after tax $ 1,891,000.00 $ 1,891,000.00 $ 1,891,000.00
Terminal value $ 330,000.00
Net cash flow after tax $ 1,891,000.00 $ 1,891,000.00 $ 2,221,000.00
Discount rate @ 23.52% 0.810 0.656 0.531
Present value of cash
flows $ 1,531,174.09 $ 1,239,817.08 $ 1,179,091.98
Total $ 3,950,083.15
Net present value –
= Present value of cash flows – Initial investment
= $ 39,50,083.15 – $ 30,00,000 = $ 950,083.15

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It can be seen from the above calculation that the resultant NPV of project is positive
that is $ 950,083.15. Therefore, CWC shall accept the proposed project of bottled water as
per best case scenario.
Worst – case scenario
Calculation of cash flow
Particulars Units Amount
Sales (units) 950,000.00
Sales revenue (p.u) $ 1.32
Total sales revenue $ 1,254,000.00
Variable cost (p.u) $ 0.27
Total variable cost $ 256,500.00
Contribution $ 997,500.00
Less: Fixed cost $ 200,000.00
Net income before tax $ 797,500.00
Calculation of NPV
Year 1 Year 2 Year 3
Cash flows before tax $ 797,500.00 $ 797,500.00 $ 797,500.00
Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Income before taxes $ (202,500.00) $ (202,500.00) $ (202,500.00)
Taxes @ 34% $ (68,850.00) $ (68,850.00) $ (68,850.00)
Net income after tax $ (133,650.00) $ (133,650.00) $ (133,650.00)
Add: Depreciation $ 1,000,000.00 $ 1,000,000.00 $ 1,000,000.00
Cash flow after tax $ 866,350.00 $ 866,350.00 $ 866,350.00
Terminal value $ 330,000.00
Net cash flow after tax $ 866,350.00 $ 866,350.00 $ 1,196,350.00
Discount rate @ 23.52% 0.810 0.656 0.531
Present value of cash
flows $ 701,497.98 $ 568,014.56 $ 635,122.33
Total $ 1,904,634.86
Net present value –
= Present value of cash flows – Initial investment
= $ 19,04,634.86 – $ 30,00,000 = - $ 10,95,365.15

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It can be seen from the above calculation that the resultant NPV of project is in
negative that is - $ 10,95,365.15. Therefore, CWC shall not accept the proposed project of
bottled water as per worst case scenario.
Answer d
As the financial analyst, before providing any suggestions the analyst shall gain
complete knowledge of the client’s business, their preference and requirements. Further, he
shall arrange a meeting with the concerned person to explain the brief idea regarding net
present value and associated factors. Moreover, he shall go through the last year’s financial
records and the projected budget to analyse the sales level and cash flow (Lee and Lee 2015).
The NPV is the difference among the present value of the cash inflows and outflows
over the specific period of the time. It is used under capital budgeting for analyzing the
profitability of project or investment in a project. If the NPV of the project is positive it
indicates that the earnings created from the investment exceeds the projected costs. Generally
a project with positive NPV is regarded as profitable and with negative NPV is regarded as
the project that will generate loss. This is the basic rule for NPV that states that the
investment shall be made with the project only that has positive NPV (Pasqual, Padilla and
Jadotte 2013). It takes into consideration the below mentioned 2 inputs –
 Target rate of return that is hurdle rate
 Projected cash inflows from the project in successive periods
Further, it takes into account the time value of money that makes it better approach
for the technique of investment appraisal as compared to other methods like IRR.
Taking into consideration the above presented computations, it is observed that the
resultant NPV of project is positive that is $ 950,083.15 only under best case scenario. The

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NPV under current scenario as well under worst case scenario is negative. Therefore, CWC
shall accept the proposed project of bottled water under best case scenario only.


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Reference
Lee, I. and Lee, K., 2015. The Internet of Things (IoT): Applications, investments, and
challenges for enterprises. Business Horizons, 58(4), pp.431-440.
Magni, C.A., 2015. Investment, financing and the role of ROA and WACC in value
creation. European Journal of Operational Research, 244(3), pp.855-866.
Pasqual, J., Padilla, E. and Jadotte, E., 2013. Equivalence of different profitability criteria
with the net present value. International Journal of Production Economics, 142(1), pp.205-
210.
Žižlavský, O., 2014. Net present value approach: method for economic assessment of
innovation projects. Procedia-Social and Behavioral Sciences, 156, pp.506-512.