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 $2.33 million fully installed and has a 10 year life. It will be depreciated to a book value of $174,761.00 and sold for that amount in year 10.

b. The Engineering Department spent $30,210.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $22,957.00.

d. The PJX5 will reduce operating costs by $486,614.00 per year.

e. CSD’s marginal tax rate is 38.00%.

f. CSD is 64.00% equity-financed.

g. CSD’s 18.00-year, semi-annual pay, 6.71% coupon bond sells for $1,007.00.

h. CSD’s stock currently has a market value of $24.93 and Mr. Bensen believes the market estimates that dividends will grow at 2.72% forever. Next year’s dividend is projected to be $1.68.

Answer 1

Solution:-

Depreciation per year =

Depreciation per year = $2,15,523.9

Engineering cost and redesigned cost are treated as sunk cost. Hence it is irrelevant in Nature. Hence, Not added in the Initial Investment. Non Relevant cost are those which does not affect the users decision.

To Calculate IRR of the Project-

IRR of the Project is 10.91%

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