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 $2.29 million fully installed and has a 10 year life. It will be depreciated to a book value of $293,616.00 and sold for that amount in year 10.

b. The Engineering Department spent $25,894.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,337.00.

d. The PJX5 will reduce operating costs by $489,801.00 per year.

e. CSD’s marginal tax rate is 21.00%.

f. CSD is 64.00% equity-financed.

g. CSD’s 17.00-year, semi-annual pay, 6.01% coupon bond sells for $1,003.00.

h. CSD’s stock currently has a market value of $21.04 and Mr. Bensen believes the market estimates that dividends will grow at 2.93% forever. Next year’s dividend is projected to be $1.57.

Answer 1

Solution :-

Depreciation Per Year = ( Purchase Price - Salvage Value ) / Useful life = ( $2,290,000 - $293,616 ) / 10 = $258,361.60

Therefore IRR of the Project = 14.97%

Their is no use of Research and floor modification costs in calculating after tax cash flows as they are sunk costs.

If there is any doubt please ask in comments