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 $2.11 million fully installed and has a 10 year life. It will be depreciated to a book value of $230,848.00 and sold for that amount in year 10. b. The Engineering Department spent $46,020.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,997.00. d. The PJX5 will reduce operating costs by $385,887.00 per year. e. CSD’s marginal tax rate is 30.00%. f. CSD is 58.00% equity-financed. g. CSD’s 14.00-year, semi-annual pay, 6.90% coupon bond sells for $1,036.00. h. CSD’s stock currently has a market value of $24.65 and Mr. Bensen believes the market estimates that dividends will grow at 3.91% forever. Next year’s dividend is projected to be $1.50.

Answer 1

Depreciation = (cost - salvgae value) /number of years

= (2,110,000 - 230848) / 10

= 187,915.20

so IRR = 9.84%