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 IRR of the PJX5?

a. The PJX5 will cost $1.69 million fully installed and has a 10 year life. It will be depreciated to a book value of $137,570.00 and sold for that amount in year 10.

b. The Engineering Department spent $19,746.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $20,459.00.

d. The PJX5 will reduce operating costs by $462,425.00 per year.

e. CSD’s marginal tax rate is 34.00%.

f. CSD is 60.00% equity-financed.

g. CSD’s 17.00-year, semi-annual pay, 5.49% coupon bond sells for $955.00.

h. CSD’s stock currently has a market value of $21.84 and Mr. Bensen believes the market estimates that dividends will grow at 2.80% forever. Next year’s dividend is projected to be $1.64.

Submit

Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Answer 1

Solution :-

Researching and Redesigning costs are irrelevant as these are sunk cost so no use of these costs