Question

24. please answer them all.

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 IRR of the PJX5?

a. The PJX5 will cost $1.71 million fully installed and has a 10 year life. It will be depreciated to a book value of $212,864.00 and sold for that amount in year 10.

b. The Engineering Department spent $25,947.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,107.00.

d. The PJX5 will reduce operating costs by $412,260.00 per year.

e. CSD’s marginal tax rate is 25.00%.

f. CSD is 62.00% equity-financed.

g. CSD’s 14.00-year, semi-annual pay, 5.09% coupon bond sells for $1,037.00.

h. CSD’s stock currently has a market value of $23.14 and Mr. Bensen believes the market estimates that dividends will grow at 4.09% forever. Next year’s dividend is projected to be $1.73.

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $28.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.19 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.93 million per year and cost $2.45 million per year over the 10-year life of the project. Marketing estimates 17.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 29.00%. The WACC is 13.00%. Find the NPV (net present value).

Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $22.00 million. The plant and equipment will be depreciated over 10 years to a book value of $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.38 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.23 million per year and cost $2.35 million per year over the 10-year life of the project. Marketing estimates 15.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 21.00%. The WACC is 14.00%. Find the IRR (internal rate of return).

Answer 1

Cost of capital (WACC) = Weight of Debt * Cost of debt + Weight of Equity * Cost of Equity

Coupon paid semi annual ,

Cost of debt = [(1+(5.09%/2))^2-1]*(1-25%)= 3.866%

Cost of equity (based on Gordan model): P= D₁ / K-g => K =( D₁ / P)+g

=> K = (1.73/23.14)+4.09%= 11.566%

WACC =3.886%*38%+ 11.566%*62%= 8.648%.

Annual depreciation = (1710000-212864)/10 = $149,713.6

Answer 1)

Year	0	1		2	3	4	5	6	7	8	9	10
Cost	-$17,10,000.0
Researching	-$18,107.0
Floor	-$4,12,260.0
Total cost	-$21,40,367.0
Benefit		$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0	$4,12,260.0
Depreciation		-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6	-$1,49,713.6
Residual Value												212864
Cash before tax		$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	$2,62,546.4	262546	475410
Less Tax(@25%)		-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$65,636.6	-$118853
Net cash flow after tax		$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	$1,96,909.8	356558
Add depreciation		$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	$1,49,713.6	149714	149714
Cash flow operation	-$21,40,367.0	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$3,46,623.4	$506272
IRR	11.62%	IRR(B15:M15)

Answer 2)

Year	0	1		2	3	4	5	6	7	8	9	10
Cost	-$2,80,00,000.0
Working capital	-$11,90,000.0
Total cost	-$2,91,90,000.0
Benefit		$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0	$89,30,000.0
Cost		-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0	-$24,50,000.0
Depreciation		-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0	-$27,00,000.0
Residual Value												1000000
Working capital return												$11,90,000.0
Cash before tax		$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$37,80,000.0	$59,70,000.0
Less Tax(@29%)		-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$10,96,200.0	-$17,31,300.0
Net cash flow after tax		$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	$26,83,800.0	2683800	4238700
Add depreciation		$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	$27,00,000.0	2700000	2700000
Cash flow operation	-$2,91,90,000.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$53,83,800.0	$69,38,700.0
WACC	12.00%
NPV	$32,24,381.18	NPV(12%,C16:M16)+B16

Answer 3)

Year	0	1		2	3	4	5	6	7	8	9	10
Cost	-$2,20,00,000.0
Working capital	-$13,80,000.0
Total cost	-$2,33,80,000.0
Benefit		$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0	$92,30,000.0
Cost		-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0	-$23,50,000.0
Depreciation		-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0	-$19,00,000.0
Residual Value												3000000
Working capital return												$13,80,000.0
Cash before tax		$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$49,80,000.0	$93,60,000.0
Less Tax(@21%)		-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$10,45,800.0	-$19,65,600.0
Net cash flow after tax		$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	$39,34,200.0	3934200	7394400
Add depreciation		$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	$19,00,000.0	1900000	1900000
Cash flow operation	-$2,33,80,000.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$58,34,200.0	$92,94,400.0
WACC	14.00%
IRR	22.67%	IRR(B16:M16)