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 $1.58 million fully installed and has a 10 year life. It will be depreciated to a book value of $220,628.00 and sold for that amount in year 10.

b. The Engineering Department spent $14,803.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $20,051.00.

d. The PJX5 will reduce operating costs by $307,163.00 per year.

e. CSD’s marginal tax rate is 36.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 5.41% coupon bond sells for $979.00.

h. CSD’s stock currently has a market value of $21.91 and Mr. Bensen believes the market estimates that dividends will grow at 2.33% forever. Next year’s dividend is projected to be $1.68.

Answer 1

before tax cost of debt =using rate function in M S excel	rate(nper,pmt,pv,fv,type) nper =38 pmt = 1000*5.41%*1/2 = 27.05 pv = -979 fv =1000 type =0	RATE(38,27.05,-979,1000,0)	2.80%
after tax annual cost of debt	(2.80*2)*(1-.36)	3.584
cost of equity =(expected dividend/market price)+growth rate)	(1.68/21.91)+2.33%	10.00%
WACC
source	weight	component cost	weight*component cost
debt	42%	3.58%	1.5052800%
equity	58%	10%	5.8000000%
total	100%	WACC = sum of weight*component cost	7.31%
cost of juicer	-1580000
installation expenses	-20051
total cash outflow	-1600051
Annual cash flow
annual savings		307163
less annual depreciation =(1580000-220628)/10		135937.2
operating savings		171225.8
less taxes-36%		61641.288
after tax savings		109584.512
add depreciation		135937.2
net cash flow (year1 to year 9)		245521.712
cash flow in year year 10	245521.712+220628)	466149.712
year	cash flow	present value factor at 7.31% =1/(1+r)^n	present value of cash flow = cash flow*present value factor
0	-1600051	1	-1600051
1	245521.712	0.931879601	228796.6751
2	245521.712	0.868399591	213210.9543
3	245521.712	0.809243865	198686.9391
4	245521.712	0.75411785	185152.3055
5	245521.712	0.702747041	172539.6566
6	245521.712	0.654875632	160786.1864
7	245521.712	0.610265243	149833.3672
8	245521.712	0.568693731	139626.6585
9	245521.712	0.529954087	130115.2348
10	466149.712	0.493853404	230209.6219
net present value = sum of present value of cash flow			208906.60