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.

Any help would be greatly appreciated! I tried the answer $547522.18 but it was incorrect, please help!

Answer 1

Solution:

a)Cost of Debt

Cost of Debt=Interest+(Face Value-Purchase Price/Years to Maturity)/(Face Value+Purchase price/2

Semiannual Interest rate is 5.26%,hence annual interest rate is 10.52%

Interest=$1000*10.52%=$105.2

Cost of Debt=105.20+(1000-977/10)/(1000+977/2)

=(105.20+2.3)/988.5

=10.88%

After Tax cost of debt(Kd)=10.88%(1-Tax rate)

=10.88%(1-.30)

=7.62%

b)Cost of equity(Ke)

Ke=(Expected Dividend/Stock Price)+Growth rate

=($1.58/ $23.45)+0.0432

=11.06%

c)WACC

Weight of equity(We)=58% or .58

Weight of Debt(Wd)=1-.58=.42

WACC=Ke*We+Kd*wd

=11.06%*.58+7.62%*.42

=6.4148%+3.2004%

=9.62%

d)Initial Outlay

=Equipment cost+researching cost+redesigning Cost

=$2480,000+$40,916+$24,980

=$2545,896

f)Net Annual Cost Saving

Annual Depreciation=($2480,000-$112,182)/10

=$236781.80

Net Annual Cost Saving

	Amount
Annual cost saving	$322,303.00
Less:Depreciation	$236,781.80
Cost Saving Before Tax	$85,521.20
Less:Tax @30%	25,656.36
Cost Saving after tax	59,864.84
Add:Depreciation	236,781.80
Net Annual Cost Saving	$296,646.64

g)Net Present Value

NPV=(Present value of Net Annual Cost Saving+Present value of Salvage value)-Initial outlay

=($296,646.64*PVAF @WACC for 10 years+$112,182*PVIF @WACC for 10 year)-$2545,896

=$296,646.64*6.246+$112,182*.399-$2545,896

=$1852854.91+44760.62-$2545,896

=-$648280.47

Thus NPV is -$648280.47(negative)