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 $2.24 million fully installed and has a 10 year life. It will be depreciated to a book value of $248,640.00 and sold for that amount in year 10.

b. The Engineering Department spent $19,569.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $21,530.00.

d. The PJX5 will reduce operating costs by $348,687.00 per year.

e. CSD’s marginal tax rate is 22.00%.

f. CSD is 62.00% equity-financed.

g. CSD’s 17.00-year, semi-annual pay, 6.22% coupon bond sells for $980.00.

h. CSD’s stock currently has a market value of $21.32 and Mr. Bensen believes the market estimates that dividends will grow at 3.38% forever. Next year’s dividend is projected to be $1.47.

Answer 1

Solution:-

Depreciation per year =

Depreciation per year = $1,99,136

To Calculate WACC-

Cost of Bond-

YTM per annum = 3.21% * 2

YTM per annum = 6.42%

YTM after Tax = 6.42% (1-0.22)

Cost of debt after tax = 5.0076%

Cost of Equity =

Cost of Equity =

Cost of Equity = 10.27%

WACC = 5.0076%* (1-0.62) +10.27% *0.62

WACC = 8.27%

Engineering cost and redesigned cost are treated as sunk cost. Hence it is irrelevant in Nature. Hence, Not added in the Initial Investment. Non Relevant cost are those which does not affect the users decision.

To calculate NPV of the Project-

NPV of the Project is -$34,287.92

If you have any query related to question then feel free to ask me in a comment.Thanks.