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 $1.62 million fully installed and has a 10 year life. It will be depreciated to a book value of $120,755.00 and sold for that amount in year 10.

b. The Engineering Department spent $45,543.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $22,525.00.

d. The PJX5 will reduce operating costs by $310,282.00 per year.

e. CSD’s marginal tax rate is 26.00%.

f. CSD is 69.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 6.16% coupon bond sells for $965.00.

h. CSD’s stock currently has a market value of $23.11 and Mr. Bensen believes the market estimates that dividends will grow at 4.11% forever. Next year’s dividend is projected to be $1.48.

Answer 1

NPV calculation

Particulars
Inflow per year	310282
less; depreciation(wn1)Per yr	94124.5
Cashflow after Depreciation	216157.5
Less Tax @26%	56200.95
Cashflow after tax	159957.5
added back: Depreciation	94124.5
Net cash flow	254082
Annuity Factor For ke 10.51%(wn2)	6.013
Discouted cashflow	1527795.06
Less : initial outflow (wn3)	1130068
NPV	397727.06

Working notes

1.Depreciation

Cost =1062000

Salvage value =120755

So Depreciation=(1062000-120755)/10 =94124.5/yr

2.Cost of capital(Dividend price growth approach)

Ke =(Expected dividend/MPS)+growth rate

=(1.48/23.11)+4.11%

=10.51%

3. Initial cashflow:

Cost =1062000

Research exp =45543

Floor redesign =22525

Total =1130068