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 $1.74 million fully installed and has a 10 year life. It will be depreciated to a book value of $239,330.00 and sold for that amount in year 10.

b. The Engineering Department spent $41,660.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $17,894.00.

d. The PJX5 will reduce operating costs by $413,960.00 per year.

e. CSD’s marginal tax rate is 21.00%.

f. CSD is 70.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 6.06% coupon bond sells for $958.00.

h. CSD’s stock currently has a market value of $22.05 and Mr. Bensen believes the market estimates that dividends will grow at 3.86% forever. Next year’s dividend is projected to be $1.72.

I'm using a financial calculator to answer this problem not excel so please use the calculator.

Answer 1

point b & c are sunk cost and hence irrelevant for decision making

First of all we will calculate WACC, for that we need YTM, Kd and Ke

YTM = C + (F-P)/N / (F+P)/2

YTM = 60.6 + (1000-958)/19 / 1958/2

YTM = 8.27 / 979 = 6.416%

Kd = YTM (1-t)

Kd = 5.068 %

Ke = D1 / P0 + g

Ke = 1.72 / 22.05 + 0.0386

Ke = 0.1166 or 11.66 %

WACC = Wd*Kd +We*Ke

WACC = 0.30*5.068 + 0.70*11.66

WACC = 9.6824

Calculation of NPV

1. Initial Outflow = $ 1.74 Million

2. Cash Flow After Tax

Calculation of Depreciation = (1740000-239220)/10 = 150078

Particulars	Amount
Reduction in operating cost	413,960
Less Depreciation	150,078
Profit Before Tax	263,882
Tax @ 21%	55,415
Profit After Tax	208,467
Add Depreciation	150,078
Cash Flow After Tax	358,545

PV of Cash flow after tax of 358,545 to be recieved for 10 years using 9.6824 as discount rate

PV = 358545 * PVAF 9.6824%, 10

PV = 358545 * 6.23 = 2,233,484.66

Terminal Value = Salvage Value of Machine = 239,330

NPV = PV of Annual Cash Flow + Terminal Value - Initial Investment

NPV = 2,233,484. + 239,330 -1,740,000

NPV = 732,814