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 $1.54 million fully installed and has a 10 year life. It will be depreciated to a book value of $235,797.00 and sold for that amount in year 10.

b. The Engineering Department spent $14,609.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,818.00.

d. The PJX5 will reduce operating costs by $491,341.00 per year.

e. CSD’s marginal tax rate is 26.00%.

f. CSD is 55.00% equity-financed.

g. CSD’s 13.00-year, semi-annual pay, 5.80% coupon bond sells for $1,021.00.

h. CSD’s stock currently has a market value of $22.03 and Mr. Bensen believes the market estimates that dividends will grow at 3.20% forever. Next year’s dividend is projected to be $1.61

Answer 1

Solution:- Given in Question-

Installed cost = $1.54 Million

Life = 10 years

Salvage Value = $2,35,797.

Engineering cost = $14,609

Redesign cost = $15,818

Reduce Operating cost per year = $4,91,341

First we need to calculate Discounting Factor-

Cost of Debt =

Cost of Debt =

Cost of Debt = 3.626

Cost of Debt after tax = 3.626 ( 1 - Tax)

Cost of Debt after tax = 3.626 ( 1 - 0.26)

Cost of Debt after tax = 2.683%

Cost of Equity =

Cost of Equity =

Cost of Equity = 10.91%

Cost of Company = Cost of Debt after tax * Weight of debt + Cost of Equity * weight of equity

Cost of Company = 2.683% * 0.45 + 10.91% * 0.55

Cost of Company = 7.21%

Total Initial Cost = Installed cost + Engineering cost + Redesign cost

Total Initial Cost = $1.54 Million + $14,609 + $15,818

Total Initial Cost = $15,70,427

To Calculate NPV -

Hence, NPV of the project is $19,64,835.

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