Question

1. 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 $1.92 million fully installed and has a 10 year life. It will be depreciated to a book value of $286,266.00 and sold for that amount in year 10.

b. The Engineering Department spent $45,622.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,798.00.

d. The PJX5 will reduce operating costs by $495,462.00 per year.

e. CSD’s marginal tax rate is 28.00%.

f. CSD is 72.00% equity-financed.

g. CSD’s 20.00-year, semi-annual pay, 5.69% coupon bond sells for $997.00.

h. CSD’s stock currently has a market value of $21.47 and Mr. Bensen believes the market estimates that dividends will grow at 3.11% forever. Next year’s dividend is projected to be $1.48.

Round to 2 decimal places

2. 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 $2.37 million fully installed and has a 10 year life. It will be depreciated to a book value of $200,223.00 and sold for that amount in year 10.

b. The Engineering Department spent $29,200.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,021.00.

d. The PJX5 will reduce operating costs by $405,087.00 per year.

e. CSD’s marginal tax rate is 23.00%.

f. CSD is 64.00% equity-financed.

g. CSD’s 10.00-year, semi-annual pay, 5.21% coupon bond sells for $1,027.00.

h. CSD’s stock currently has a market value of $23.05 and Mr. Bensen believes the market estimates that dividends will grow at 2.64% forever. Next year’s dividend is projected to be $1.48.

Round to 2 decimal places

Answer 1

PART A

Working notes

1.cost of capital (Under dividend price with constant growth)

Ke = (next yr expected dividend/market price of equity)+ Growth Rate

=(1.48/21.47)+3.11%

=10.00%

2.Initial outflow

Cost of project =1092000

Floor redesign

cost =24798

Research

Expense =45622

Total =1162420

NPV calculation

Particulars	amount
reduction in operation cost Per annum	495462
less;Depreciation Per annum	286266
cash flow after depreciation	209196
Tax @ 28%	58574.88
cashflow after tax	150621.12
add: depreciation	286266
Cashflow after Depreciation	436887.12
Annuity factor@10% for 10 yrs	6.145
Discounted cash flow(AF*Cashflow)	2684671.3524
less: initial outflow	1162420
NPV	1522251.3524

PART B

Working notes

1.Ke =(1.48/23.05)+2.64%

=9.06%

2.Initial investment

cost = 2037000

Research Exp =29200

Plant redesign =24021

Total =2090221

Estimated Cashflow

Particulars	amount
reduction in operation cost Per annum	405087
less;Depreciation Per annum	200223
cash flow after depreciation	204864
Tax @ 23%	47118.72
cashflow after tax	157745.28
add: depreciation	200223
Cashflow	357968.28

DF	Cash flow	Annuity factor	Discounted cashflow	Outflow	NPV
10%	357968.28	6.145	2199715.08	2090221	109491.08
20%	357968.28	4.192	1500603.02	2090221	589617.97

IRR=LR+(Npv Lr/(NPV Lr-NPV Hr) )*(HR-LR)

=10+((109491.08/(109491+589617))*10)

=10+((109491.08/699109.05)*10)

=11.56%