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 $2.28 million fully installed and has a 10 year life. It will be depreciated to a book value of $171,811.00 and sold for that amount in year 10.

b. The Engineering Department spent $25,080.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $19,032.00.

d. The PJX5 will reduce operating costs by $404,511.00 per year.

e. CSD’s marginal tax rate is 30.00%. f. CSD is 70.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 5.05% coupon bond sells for $1,028.00.

h. CSD’s stock currently has a market value of $21.27 and Mr. Bensen believes the market estimates that dividends will grow at 4.37% forever. Next year’s dividend is projected to be $1.58.

Answer 1

Let us first find the WACC as shown below:

Next, we start working on cash flows:

Note that Research cost & floor redesign cost should not be included as they are already spent so they are sunk costs from this project's viewpoint.

So the NPV = $39,906.62