Caspian Sea Drinks is considering the purchase of a plum juicer – the PJX5. There is...

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Caspian Sea Drinks is considering the purchase of a plum juicer– the PJX5. There is no planned increase in production. The PJX5will reduce costs by squeezing more juice from each plum and doingso in a more efficient manner. Mr. Bensen gave Derek the followinginformation. What is the NPV of the PJX5?
a. The PJX5 will cost $1.89 million fully installed and has a 10year life. It will be depreciated to a book value of $241,495.00and sold for that amount in year 10.
b. The Engineering Department spent $10,602.00 researching thevarious juicers.
c. Portions of the plant floor have been redesigned toaccommodate the juicer at a cost of $24,225.00.
d. The PJX5 will reduce operating costs by $397,963.00 peryear.
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 sellsfor $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 at2.44% forever. Next year’s dividend is projected to be $1.79.

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4.4 Ratings (717 Votes)

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)/(0.08431.0843^10) =	$ 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

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Transcribed Image Text

Caspian Sea Drinks is considering the purchase of a plum juicer– the PJX5. There is no planned increase in production. The PJX5will reduce costs by squeezing more juice from each plum and doingso in a more efficient manner. Mr. Bensen gave Derek the followinginformation. What is the NPV of the PJX5?a. The PJX5 will cost $1.89 million fully installed and has a 10year life. It will be depreciated to a book value of $241,495.00and sold for that amount in year 10.b. The Engineering Department spent $10,602.00 researching thevarious juicers.c. Portions of the plant floor have been redesigned toaccommodate the juicer at a cost of $24,225.00.d. The PJX5 will reduce operating costs by $397,963.00 peryear.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 sellsfor $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 at2.44% forever. Next year’s dividend is projected to be $1.79.