Question

1. 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 $1.63 million fully installed and has a 10 year life. It will be depreciated to a book value of $241,344.00 and sold for that amount in year 10.

b. The Engineering Department spent $49,388.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,137.00.

d. The PJX5 will reduce operating costs by $469,222.00 per year.

e. CSD’s marginal tax rate is 33.00%.

f. CSD is 57.00% equity-financed.

g. CSD’s 12.00-year, semi-annual pay, 6.47% coupon bond sells for $972.00.

h. CSD’s stock currently has a market value of $24.59 and Mr. Bensen believes the market estimates that dividends will grow at 4.44% forever. Next year’s dividend is projected to be $1.42.

2. 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 $1.63 million fully installed and has a 10 year life. It will be depreciated to a book value of $272,465.00 and sold for that amount in year 10.

b. The Engineering Department spent $15,762.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,418.00.

d. The PJX5 will reduce operating costs by $316,152.00 per year.

e. CSD’s marginal tax rate is 25.00%.

f. CSD is 55.00% equity-financed.

g. CSD’s 13.00-year, semi-annual pay, 6.20% coupon bond sells for $1,033.00.

h. CSD’s stock currently has a market value of $21.02 and Mr. Bensen believes the market estimates that dividends will grow at 3.43% forever. Next year’s dividend is projected to be $1.55.

Answer format: Currency: Round to: 2 decimal places.

Answer 1

1.

Depreciation = Cost - Salvage Value /no. of life
Depreciation=	(1630000-241344)/10
Depreciation=	138,866

Now we need to find the WACC from the information given to use as required rate of return

WACC= {kd (1-t)*debt/ debt+ equity}+ {ke*equity/debt+ equity}

So we need to find the cost of equity and cost of debt:

cost of old Equity	= Dividend for next year/ equity share price+ growth
growth	4.40%
dividend of next yr	1.42
Cost of equity=	=1.42/24.59 +4.4%
	0.057+0.044
	0.1017
	=10.17%

Cost of Bond

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

C= coupon amount= 1000*6.47= 64.7

F= face value=1000

P= Price= 972

N= tenor= 12

YTM= (64.7+(1000-972)/12)/(1000+972/2)

YTM=67.033/986

YTM= 0.6798 or 6.798%

Particulars	Cost	tax	After tax cost	weight	after tax cost * weights
Bonds	6.80%	34%	=0.068*(1-0.34 ) = 0.04488 or 4.49%	43%	0.0449*0.43	0.0193
Equity	10.17%	0%	10.17%	57%	0.1017*0.57	0.06
			total			0.0773

Weighted average cost of capital = 7.73%

Now using this as required rate of return we will find the NPV of the project.

So ,

Year	Particulars ( cash flows)	cash flow	Depreciation	profit before tax ( income-dep.)	Tax (33%)	Net profit ( cash flow - tax)	Net Cash Flow ( Net profit after tax + depreciation)	Discounting factor (7.73%)	Discounting factor (7.73%)	Net Present value = NCF * DF
	Initial cost	-1,630,000
		-49,388
		-15,137
	Total cost	-1,694,525								-1,694,525
1	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^1	0.93	$ 334,358.48
2	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^2	0.86	$      310,367.10
3	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^3	0.80	$              288,097.19
4	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^4	0.74	$               267,425.22
5	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^5	0.69	$               248,236.53
6	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^6	0.64	$               230,424.70
7	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^7	0.59	$               213,890.94
8	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^8	0.55	$               198,543.52
9	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^9	0.51	$               184,297.34
10	Cost savings	469,222	138,866	330,356	109,018	221,339	360,204	1/(1+0.0773)^10	0.47	$               171,073.37
								NPV	NPV ( sum total)	$               752,189.39

To calculated the cash flow, we need to add back the depreciation ,as it is anon cash expenses.

Net Present Value = Total Cash Inflows from Investments – Cost of Investments

So we can see that NPV= $752,189.32