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? (rounded to 2 decimals)

a. The PJX5 will cost $2.50 million fully installed and has a 10 year life. It will be depreciated to a book value of $182,310.00 and sold for that amount in year 10.

b. The Engineering Department spent $40,256.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $16,200.00.

d. The PJX5 will reduce operating costs by $369,493.00 per year.

e. CSD’s marginal tax rate is 32.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 14.00-year, semi-annual pay, 6.90% coupon bond sells for $967.00.

h. CSD’s stock currently has a market value of $21.57 and Mr. Bensen believes the market estimates that dividends will grow at 3.52% forever. Next year’s dividend is projected to be $1.69.

I tried the answer 5.88% for the IRR, but it was incorrect. Any help would be greatly appreciated!

Answer 1

Answer :- IRR = 5.98%

Reason you might be getting wrong answer because you may be taking the cost mentioned in Poin b & c.

Calculation :-