Question

# 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 \$1.62 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.

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