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 $1.89 million fully installed and has a 10 year life. It will be depreciated to a book value of $241,495.00 and sold for that amount in year 10.

b. The Engineering Department spent $10,602.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,225.00.

d. The PJX5 will reduce operating costs by $397,963.00 per year.

e. CSD’s marginal tax rate is 23.00%.

f. CSD is 69.00% equity-financed.

g. CSD’s 16.00-year, semi-annual pay, 5.68% coupon bond sells for $1,012.00.

h. CSD’s stock currently has a market value of $22.81 and Mr. Bensen believes the market estimates that dividends will grow at 2.44% forever. Next year’s dividend is projected to be $1.79.

Answer 1

INITIAL OUTLAY:
Cost of the Plum Juicer	$    18,90,000
ANNUAL OPERATING CASH FLOW:
Reduction in annual operating costs	$      3,97,963
Depreciation = (1890000-241495)/10 =	$      1,64,851
Incremental NOI	$      2,33,113
Tax at 23%	$ 53,616
Incremental NOPAT	$      1,79,497
Add: Depreciation	$      1,64,851
Incremental OCF	$      3,44,347
TERMINAL NON OPERATING CASH FLOWS:
After tax sale value of the Juicer = 241495*(1-23%) =	$      1,85,951
WACC:
Cost of equity per DDM = 1.79/22.81+0.0244 =	10.29%
YTM of bonds using a calculator = 5.57%
After tax cost of debt = 5.57%*(1-23%) =	4.29%
WACC = 10.29%*69%+4.29%*31% =	8.43%
NPV:
PV of annual OCF = 344347*(1.0843^10-1)/(0.0843*1.0843^10) =	$    22,66,444
PV of terminal non operating cash flow = 185951/1.0843^10 =	$ 82,776
Total PV of cash inflows	$    23,49,220
Less: Initial investment	$    18,90,000
NPV	$      4,59,220