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 $2.42 million fully installed and has a 10 year life. It will be depreciated to a book value of $241,051.00 and sold for that amount in year 10.

b. The Engineering Department spent $19,649.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,429.00.

d. The PJX5 will reduce operating costs by $352,412.00 per year.

e. CSD’s marginal tax rate is 21.00%.

f. CSD is 60.00% equity-financed.

g. CSD’s 15.00-year, semi-annual pay, 6.08% coupon bond sells for $971.00.

h. CSD’s stock currently has a market value of $23.38 and Mr. Bensen believes the market estimates that dividends will grow at 2.21% forever. Next year’s dividend is projected to be $1.74.

Answer 1

We can calculate the NPV of the Plum Juicer as follows

Cost of Machine = $ 2,420,000 ; Salvage Value = $ 241,051 ; Life = 10 years

Depreciation per year = (Cost - salvage value) / life   

=( 2420000 - 241051 ) / 10

= $ 217,895

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

We need to calculate the cost of equity and cost of debt:

Cost of Equity

Cost Of Equity	([Dividend for next year/ share price]+ growth rate)
Growth rate	2.21%
Dividend for next year	$ 1.74
Share Price	$ 23.38

Cost of equity = (1.74 / 23.38) + 2.21%

= 0.074 + 0.022

= 0.096 or 9.6%

Cost of Debt

Par Value of bonds (Estimated)	$ 1000
Current Value	$ 971
Coupon rate	6.08%
Coupon Price	$ 61
Maturity	15 years
Yield to maturity

Yield to maturity: [(Coupon payment +(Par value - Current price)/time) / ((Par value + Current price)/2)]

= ( 61 +(1000 - 971)/15) / ((1000 + 971)/2)

= (61 + 1.93) / (985.5)

= 0.064 or 6.40%

After Tax cost of debt = Yield to maturity *(1-tax)

= 6.40 * ( 1-21%)

= 5.056%

Equity ratio given = 60% ; Debt ratio = 1 - equity ratio = 40%

Type	Cost after tax	Ratio	Cost after tax * ratio
Equity	9.60%	60%	5.76%
Debt	5.06%	40%	2.02%

WACC = 5.76% + 2.02% = 7.78%

Using this rate we can calculate the NPV in excel sheet

Formulas used in excel sheet are

So, the NPV of the PJX5 comes out to be $ - 153,211.11

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