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? (rounded to 2 decimals)

a. The PJX5 will cost $2.48 million fully installed and has a 10 year life. It will be depreciated to a book value of $112,182.00 and sold for that amount in year 10.

b. The Engineering Department spent $40,916.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,980.00.

d. The PJX5 will reduce operating costs by $322,303.00 per year.

e. CSD’s marginal tax rate is 30.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 10.00-year, semi-annual pay, 5.26% coupon bond sells for $977.00.

h. CSD’s stock currently has a market value of $23.45 and Mr. Bensen believes the market estimates that dividends will grow at 4.32% forever. Next year’s dividend is projected to be $1.58.

Answer 1

The NPV Calculated is $-547522.18

Calculations shown below

Showing formulas for above

The discount rate used had to calculated as per the information given

The discount rate used is 8.75%

Calculations shown below

Formulas for the above calculation shown