Question

Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is no planned increase in production. The PJX5 will reduce costs by squeezing more juice from each plum and doing so in a more efficient manner. Mr. Bensen gave Derek the following information. What is the NPV of the PJX5?

a. The PJX5 will cost $2.17 million fully installed and has a 10 year life. It will be depreciated to a book value of $158,814.00 and sold for that amount in year 10.

b. The Engineering Department spent $19,133.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $16,816.00.

d. The PJX5 will reduce operating costs by $402,119.00 per year.

e. CSD’s marginal tax rate is 27.00%.

f. CSD is 71.00% equity-financed.

g. CSD’s 11.00-year, semi-annual pay, 6.43% coupon bond sells for $992.00.

h. CSD’s stock currently has a market value of $21.08 and Mr. Bensen believes the market estimates that dividends will grow at 3.98% forever. Next year’s dividend is projected to be $1.60.

Thanks!

Answer 1

before tax cost of debt =using rate function in M S excel	rate(nper,pmt,pv,fv,type) nper =22 pmt = 1000*6.43%*1/2 = 32.15 pv = -992 fv =1000 type =0	RATE(22,32.15,-992,1000,0)	3.27%
after tax annual cost of debt	(3.72*2)*(1-.27)	5.431
cost of equity =(expected dividend/market price)+growth rate)	(1.6/21.08)+3.98%	11.57%
WACC
source	weight	component cost	weight*component cost
debt	29%	5.43%	1.5749900%
equity	71%	11.57%	8.2147000%
total	100%	WACC = sum of weight*component cost	9.79%
cost of juicer	-2170000
installation expenses	-19133
total cash outflow	-2189133
Annual cash flow
annual savings		402119
less annual depreciation =(2170000-158814)/10		201118.6
operating savings		201000.4
less taxes-27%		54270.108
after tax savings		146730.292
add depreciation		201118.6
net cash flow (year1 to year 9)		347848.892
cash flow in year year 10	(347848.892+158814)	506662.892
year	cash flow	present value factor at 9.79% =1/(1+r)^n	present value of cash flow = cash flow*present value factor
0	-2189133	1	-2189133
1	347848.892	0.910829766	316831.1249
2	347848.892	0.829610862	288579.2193
3	347848.892	0.755634268	262846.5428
4	347848.892	0.688254183	239408.455
5	347848.892	0.626882397	218060.347
6	347848.892	0.570983146	198615.8549
7	347848.892	0.520068446	180905.2326
8	347848.892	0.473693821	164773.8706
9	347848.892	0.431454432	150080.946
10	506662.892	0.392981539	199109.1631
net present value = sum of present value of cash flow			30077.76
before tax cost of debt =using rate function in M S excel	rate(nper,pmt,pv,fv,type) nper =22 pmt = 1000*6.43%*1/2 = 32.15 pv = -992 fv =1000 type =0	RATE(22,32.15,-992,1000,0)	3.27%
after tax annual cost of debt	(3.72*2)*(1-.27)	5.431
cost of equity =(expected dividend/market price)+growth rate)	(1.6/21.08)+3.98%	11.57%
WACC
source	weight	component cost	weight*component cost
debt	29%	5.43%	1.5749900%
equity	71%	11.57%	8.2147000%
total	100%	WACC = sum of weight*component cost	9.79%
cost of juicer	-2170000
installation expenses	-19133
total cash outflow	-2189133
Annual cash flow
annual savings		402119
less annual depreciation =(2170000-158814)/10		201118.6
operating savings		201000.4
less taxes-27%		54270.108
after tax savings		146730.292
add depreciation		201118.6
net cash flow (year1 to year 9)		347848.892
cash flow in year year 10	(347848.892+158814)	506662.892
year	cash flow	present value factor at 9.79% =1/(1+r)^n	present value of cash flow = cash flow*present value factor
0	-2189133	1	-2189133
1	347848.892	0.910829766	316831.1249
2	347848.892	0.829610862	288579.2193
3	347848.892	0.755634268	262846.5428
4	347848.892	0.688254183	239408.455
5	347848.892	0.626882397	218060.347
6	347848.892	0.570983146	198615.8549
7	347848.892	0.520068446	180905.2326
8	347848.892	0.473693821	164773.8706
9	347848.892	0.431454432	150080.946
10	506662.892	0.392981539	199109.1631
net present value = sum of present value of cash flow			30077.76