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 $1.78 million fully installed and has a 10 year life. It will be depreciated to a book value of $242,327.00 and sold for that amount in year 10.

b. The Engineering Department spent $14,645.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,737.00.

d. The PJX5 will reduce operating costs by $463,693.00 per year.

e. CSD’s marginal tax rate is 34.00%.

f. CSD is 65.00% equity-financed.

g. CSD’s 18.00-year, semi-annual pay, 5.78% coupon bond sells for $987.00.

h. CSD’s stock currently has a market value of $20.88 and Mr. Bensen believes the market estimates that dividends will grow at 3.30% forever. Next year’s dividend is projected to be $1.54.

Answer 1

As a first step, we need to calculate the discount rate, r

Please see the table below. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.

These two cash flows have already been incurred, they are irreversible and hence no longer incremental and hence not relevant. They are sunk costs and have been excluded from the capital budgeting.

b. The Engineering Department spent $14,645.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,737.00.

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $. Adjacent cells in blue contain the formula in excel I have used to get the final output.