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 $243,211.00 and sold for that amount in year 10. b. The Engineering Department spent $12,635.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $20,123.00. d. The PJX5 will reduce operating costs by $400,549.00 per year. e. CSD’s marginal tax rate is 21.00%. f. CSD is 73.00% equity-financed. g. CSD’s 19.00-year, semi-annual pay, 5.25% coupon bond sells for $957.00. h. CSD’s stock currently has a market value of $22.46 and Mr. Bensen believes the market estimates that dividends will grow at 3.60% forever. Next year’s dividend is projected to be $1.77. Round to 2 decimal places

Answer 1

Solution:- Given in Question-

Installed cost = $1.72 Million

Life = 10 years

Salvage Value = $2,43,211.

Engineering cost = $12,635

Redesign cost = $20,123

Reduce Operating cost per year = $400,549

First we need to calculate Discounting Factor-

Cost of Debt =

Cost of Debt =

Cost of Debt = 5.828

Cost of Debt after tax = 5.828 ( 1 - Tax)

Cost of Debt after tax = 5.828 ( 1 - 0.21)

Cost of Debt after tax = 4.604%

Cost of Equity =

Cost of Equity =

Cost of Equity = 11.48%

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

Cost of Company = 4.604% * 0.27 + 11.48% * 0.73

Cost of Company = 9.623%

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

Total Initial Cost = $1.72 Million + $12,635 + $20,123

Total Initial Cost = $17,52,746

To Calculate NPV -

At the year end 10 the cash flow is $4,00,549 + $2,43,211 = $6,43,760

Hence, NPV of the project is $8,45,868.

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