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 $1.94 million fully installed and has a 10 year life. It will be depreciated to a book value of $139,604.00 and sold for that amount in year 10. b. The Engineering Department spent $46,551.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $21,455.00. d. The PJX5 will reduce operating costs by $317,338.00 per year. e. CSD’s marginal tax rate is 37.00%. f. CSD is 67.00% equity-financed. g. CSD’s 12.00-year, semi-annual pay, 6.53% coupon bond sells for $954.00. h. CSD’s stock currently has a market value of $24.19 and Mr. Bensen believes the market estimates that dividends will grow at 3.37% forever. Next year’s dividend is projected to be $1.59.

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:- Given in Question-

Installed cost = $1.94 Million

Life = 10 years

Salvage Value = $1,39,604.

Engineering cost = $46,551

Redesign cost = $21,455

Reduce Operating cost per year = $3,17,338

First we need to calculate Discounting Factor-

Interest Amount =

Interest Amount = $32.65

Cost of Debt =

Cost of Debt =

Cost of Debt = 7.08%

Cost of Debt after tax = 7.08% ( 1 - Tax)

Cost of Debt after tax = 7.08% ( 1 - 0.37)

Cost of Debt after tax = 4.46%

Cost of Equity =

Cost of Equity =

Cost of Equity = 9.94%

Cost of Company = Cost of Debt after tax * Weight of debt + Cost of Equity * weight of equity

Cost of Company = 4.46% * 0.33 + 9.94% * 0.67

Cost of Company = 8.13%

Total Initial Cost = Installed cost + Engineering cost + Redesign cost

Total Initial Cost = $1.94 Million +$46,551 + $21,455

Total Initial Cost = $20,08,006

To Calculate IRR -

The IRR of the Project is 9.95%

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