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 $1.72 million fully installed and has a 10 year life. It will be depreciated to a book value of $267,649.00 and sold for that amount in year 10.

b. The Engineering Department spent $36,377.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,722.00.

d. The PJX5 will reduce operating costs by $456,568.00 per year.

e. CSD’s marginal tax rate is 32.00%.

f. CSD is 61.00% equity-financed.

g. CSD’s 13.00-year, semi-annual pay, 6.55% coupon bond sells for $956.00.

h. CSD’s stock currently has a market value of $20.30 and Mr. Bensen believes the market estimates that dividends will grow at 3.35% forever. Next year’s dividend is projected to be $1.54.

Answer 1

1.

Depreciation = Cost - Salvage Value /no. of life
Depreciation=	(1720000-267,649)/10
Depreciation=	145,235

Now we need to find the WACC from the information given to use as required rate of return

WACC= {kd (1-t)*debt/ debt+ equity}+ {ke*equity/debt+ equity}

So we need to find the cost of equity and cost of debt:

cost of old Equity	= Dividend for next year/ equity share price+ growth
growth	3.35%
dividend of next yr	1.54
Cost of equity=	=1.54/20.30 +3.35%
	=10.94%

Cost of Bond

YTM= (C+ (F-P)/n)/(F+P/2)

C= coupon amount= 1000*6.55*2= 131

F= face value=1000

P= Price= 956

N= tenor= 13

YTM= (131+(1000-956)/13)/(1000+956/2)

YTM= 0.1374 or 13.74%

Particulars	Cost	tax	After tax cost	weight	after tax cost * weights
Bonds	13.74%	32%	=0.1374*(1-0.32 ) = 0.0934 or 9.34%	39%	0.0934*0.39	0.0364
Equity	10.94%	0%	10.94%	61%	0.1094*0.61	0.0667
			total			0.1031

Weighted average cost of capital = 10.31%

Calculation on NPV of the PJX5:

NPV = Present value of Cash inflow - Present value of Cash out flow

Cash outflow for the year 0:

Cost of Machine $1,720,000 + Research cost $36,377 + Redesigning cost $15,722 =$1,772,099

Yearly Cash inflow in the form of savings in operating cost $456,568

Calculation of Cash flow after tax = [{($456,568 + 145,235)(1-0.32)} + 145,235] = $554,461

Year	CFAT	PV Factor @ 10.31%	Present Value
0	-1,772,099	1	-1,772,099
1-10	554,461	6.0636	3,362,030
10 (sale value)	267,649	0.3748	100,315
Total (NPV)			1,690,246

NPV of the PJX5 = $1,690,246

Kindly give me a ?.It helps me. Thanks!!