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 $2.02 million fully installed and has a 10 year life. It will be depreciated to a book value of $269,168.00 and sold for that amount in year 10.

b. The Engineering Department spent $21,687.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,252.00.

d. The PJX5 will reduce operating costs by $378,146.00 per year.

e. CSD’s marginal tax rate is 20.00%.

f. CSD is 71.00% equity-financed.

g. CSD’s 14.00-year, semi-annual pay, 5.72% coupon bond sells for $974.00.

h. CSD’s stock currently has a market value of $21.58 and Mr. Bensen believes the market estimates that dividends will grow at 4.11% forever. Next year’s dividend is projected to be $1.41.

Answer 1