Caspian Sea Drinks

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 $2.40 million fully installed and has a 10 year life. It will be depreciated to a book value of $248,647.00 and sold for that amount in year 10.

b. The Engineering Department spent $19,769.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,364.00.

d. The PJX5 will reduce operating costs by $317,349.00 per year.

e. CSD’s marginal tax rate is 25.00%.

f. CSD is 65.00% equity-financed.

g. CSD’s 17.00-year, semi-annual pay, 6.50% coupon bond sells for $984.00.

h. CSD’s stock currently has a market value of $22.10 and Mr. Bensen believes the market estimates that dividends will grow at 4.24% forever. Next year’s dividend is projected to be $1.62.

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 IRR of the PJX5?

a. The PJX5 will cost $2.20 million fully installed and has a 10 year life. It will be depreciated to a book value of $286,798.00 and sold for that amount in year 10.

b. The Engineering Department spent $40,574.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,773.00.

d. The PJX5 will reduce operating costs by $486,178.00 per year.

e. CSD’s marginal tax rate is 26.00%.

f. CSD is 75.00% equity-financed.

g. CSD’s 13.00-year, semi-annual pay, 5.14% coupon bond sells for $996.00.

h. CSD’s stock currently has a market value of $24.07 and Mr. Bensen believes the market estimates that dividends will grow at 3.65% forever. Next year’s dividend is projected to be $1.57.

3. Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $23.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.02 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.92 million per year and cost $1.77 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 26.00%. The WACC is 12.00%. Find the NPV (net present value).

4. Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $26.00 million. The plant and equipment will be depreciated over 10 years to a book value of $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.46 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $8.81 million per year and cost $1.53 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 31.00%. The WACC is 10.00%. Find the IRR (internal rate of return).

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