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 $1.71 million fully installed and has a 10 year life. It will be depreciated to a book value of $285,571.00 and sold for that amount in year 10.

b. The Engineering Department spent $23,384.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $17,970.00.

d. The PJX5 will reduce operating costs by $369,007.00 per year.

e. CSD’s marginal tax rate is 33.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 18.00-year, semi-annual pay, 5.41% coupon bond sells for $969.00.

h. CSD’s stock currently has a market value of $20.82 and Mr. Bensen believes the market estimates that dividends will grow at 2.70% forever. Next year’s dividend is projected to be $1.60.

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 $1.71 million fully installed and has a 10 year life. It will be depreciated to a book value of $285,571.00 and sold for that amount in year 10. b. The Engineering Department spent $23,384.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $17,970.00. d. The PJX5 will reduce operating costs by $369,007.00 per year. e. CSD's marginal tax rate is 33.00%. f. CSD is 58.00% equity-financed. g. CSD's 18.00-year, semi-annual pay, 5.41% coupon bond sells for $969.00. h. CSD's stock currently has a market value of $20.82 and Mr. Bensen believes the market estimates that dividends will grow at 2.70% forever. Next year's dividend is projected to be $1.60. - Submit Answer format: Currency: Round to: 2 decimal places.

Answer 1

Solution:-

Depreciation Per year = $\frac{1,710,000 - 285,571}{10}$

Depreciation Per year = $142,442.9

To Calculate WACC-

Cost of Equity = $\frac{Dividend}{Price} + Growth$

Cost of Equity = $\frac{1.60}{20.82} + 0.027$

Cost of Equity = 10.38%

Weight of Equity = 58%

Weight of Debt = 1-0.58 = 42%

Cost of Debt-

А B 1 2 Bond YTM Semi annually before tax 3 4 5 Nper Pmt Pv FV 36 27.05 -969 6 7 1000 8 9 YTM 2.84% 10 11 Formula Rate(B4,B5,B6,B7) 12

Annual Cost of debt after tax = 2.84% * 2 * (1-0.33)

Annual Cost of debt after tax = 3.81%

WACC = 10.38% * 0.58 + 3.81% * 0.42

WACC = 7.62%

Note:- Engineering Department Cost and Redesigned Cost are Irrelevant Cost.

To Calculate NPV of the Project-

B с D E F G Н K M 9 A 1 Solution :- 2 3 4 Year 5 Initial Cost 6 Saving In Operating Cost 7 Less :- Depreciation 8 Pre Tax Cash flows 9 Less :- Tax @ 33% 10 Net Operating Profit After Tax 11 Add :- Depreciation 12 Add:- Salvage Value 13 Operating Cashflows 14 15 PVF @ 7.62% 16 17 Present Value 18 19 Net Present value 20 Statement of Cash flows After Tax ol 2 3 4 5 6 7 8 10 ($17,10,000.00) $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $3,69,007.00 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $2,26,564.10 $74.766.15 $74,766.15 $74,766.15 $74,766.15 $74,766.15 $74,766.15 $74,766.15 $74,766.15 $74.766.15 $74.766.15 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,51,797.95 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $1,42,442.90 $2,85,571.00 ($17,10,000.00) $2,94,240.85 $2,94,240.85 $2,94,240.85 2,94,240.85 2,94,240.85 2,94,240.85 2,94,240.85 2,94,240.85 2,94,240.85 5,79,811.85 1.000 0.929 0.863 0.802) 0.745 0.693 0.644 0.598 0.556 0.516 0.480 ($17,10,000.00) $2,73,407.22 $2,54,048.71 $2,36,060.87 219346.65 203815.88 189384.76 175975.44 163515.55 151937.88 278200.05 $4,35,693

B с D E F G H J K Statement of Cash flows After Tax (Formula Sheet) 4 15 6 1 12 3 18 9 10 0 =-1710000 А 1 Solution :- 2 3 4 Year 5 Initial Cost 6 Saving In Operating Cost 7 Less :- Depreciation 8 Pre Tax Cash flows 9 Less :- Tax @ 33% 10 Net Operating Profit After Tax 11 Add :- Depreciation 12 Add:- Salvage Value 13 Operating Cashflows 14 15 PVF @ 7.62% 16 17 Present Value 18 19 Net Present value 20 369007 142442.9 =C6-C7 =C8*0.33 =C8-C9 =C7 369007 142442.9 I=D6-D7 =D8*0.33 =D8-D9 I=D7 369007 142442.9 =E6-E7 =E8*0.33 =E8-E9 =E7 369007 142442.9 =F6-F7 =F8*0.33 =F8-F9 =F7 369007 142442.9 =G6-G7 =G8*0.33 =G8-G9 =G7 369007 142442.9 =H6-H7 =H8*0.33 =H8-H9 =H7 369007 142442.9 =16-17 =18*0.33 =18-19 =17 369007 142442.9 =J6-J7 =J8*0.33 =J8-J9 =J7 369007 142442.9 I=K6-K7 =K8*0.33 =K8-K9 =K7 369007 142442.9 I=L6-L7 =L8*0.33 =L8-L9 =L7 =285571 =L10+L11+L12 =B5 =C10+C11 =D10+D11 =E10+E11 =F10+F11 =G10+G11 =H10+H11 =110+111 =J10+J11 =K10+K11 =1 =B15*100/107.62 =C15*100/107.62 =D15*100/107.62 =E15*100/107.62 =F15*100/107.62 =G15*100/107.62 =H15*100/107.62 =115*100/107.62 =J15*100/107.62 =K15*100/107.62 =B13*B15 =C13*C15 =D13*D15 =E13*E15 =F13*F15 =G13*G15 =H13*H15 =113*115 =J13*J15 I=K13*K15 =L13*L15 =SUM(B17:L17)

NPV of the Project is $435,693

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