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Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...
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 $1.95 million fully installed and has a 10 year life. It will be depreciated to a book value of $200,348.00 and sold for that amount in year 10.
b. The Engineering Department spent $49,197.00 researching the various juicers.
c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,808.00.
d. The PJX5 will reduce operating costs by $461,369.00 per year.
e. CSD’s marginal tax rate is 22.00%.
f. CSD is 59.00% equity-financed.
g. CSD’s 10.00-year, semi-annual pay, 6.29% coupon bond sells for $1,030.00.
h. CSD’s stock currently has a market value of $20.04 and Mr. Bensen believes the market estimates that dividends will grow at 2.33% forever. Next year’s dividend is projected to be $1.56.
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Expert Solution
| Statement Of Computation of PV of Cash Inflows | in $ | ||||||||
| Less | Less | Add | In $ | ||||||
| Year | Cash Inflows(Savings) | Depreciation | EBT | Tax@22% | EAT | Depreciation | CFAT | Discount Factor @7.632% | Discounted Cash Flows |
| 1 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.93 | 428654.12 |
| 2 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.86 | 398258.99 |
| 3 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.80 | 370019.13 |
| 4 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.75 | 343781.71 |
| 5 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.69 | 319404.74 |
| 6 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.64 | 296756.30 |
| 7 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.60 | 275713.82 |
| 8 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.56 | 256163.43 |
| 9 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.52 | 237999.32 |
| 10 | 461369.00 | 174965.2 | 286403.80 | 63008.836 | 223394.96 | 174965.2 | 398360.16 | 0.48 | 221123.20 |
| PVCI | 2688752.24 |
| Depreciation = Original Cost - Salvage Value/ Useful Life of Asset | |||||
| Depreciation = | 1950000 - 200348/10 | ||||
| 174965.2 | Per annum |
| Statement Of Computation of PV of Cash OutFlows | in $ | ||||||
| Year | Cost Of Equipment | Redesign Expenses | R&D Expenses | Salvage Value | Cash Flows | Discount Factor @7.632% | Discounted Cash Flows |
| 0 | 1950000.00 | 18808 | 49197 | 0 | 2018005.00 | 1.00 | 2018005.00 |
| 1 | 0.00 | 0 | 0 | 0 | 0.00 | 0.93 | 0.00 |
| 2 | 0.00 | 0 | 0 | 0 | 0.00 | 0.86 | 0.00 |
| 3 | 0.00 | 0 | 0 | 0 | 0.00 | 0.80 | 0.00 |
| 4 | 0.00 | 0 | 0 | 0 | 0.00 | 0.75 | 0.00 |
| 5 | 0.00 | 0 | 0 | 0 | 0.00 | 0.69 | 0.00 |
| 6 | 0.00 | 0 | 0 | 0 | 0.00 | 0.64 | 0.00 |
| 7 | 0.00 | 0 | 0 | 0 | 0.00 | 0.60 | 0.00 |
| 8 | 0.00 | 0 | 0 | 0 | 0.00 | 0.56 | 0.00 |
| 9 | 0.00 | 0 | 0 | 0 | 0.00 | 0.52 | 0.00 |
| 10 | 0.00 | 0 | 0 | -200348 | -200348.00 | 0.48 | -96022.04 |
| PVCO | 1921982.96 | ||||||
| NPV = PVCI -PVCO | |||||||
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will reduce costs by squeezing more juice from each plum and doing
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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 IRR of the PJX5?
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