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 $2.09 million fully installed and has a 10 year life. It will be depreciated to a book value of $223,207.00 and sold for that amount in year 10.

b. The Engineering Department spent $22,567.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $23,696.00.

d. The PJX5 will reduce operating costs by $440,279.00 per year.

e. CSD’s marginal tax rate is 36.00%.

f. CSD is 65.00% equity-financed.

g. CSD’s 18.00-year, semi-annual pay, 6.26% coupon bond sells for $957.00.

h. CSD’s stock currently has a market value of $21.71 and Mr. Bensen believes the market estimates that dividends will grow at 3.02% forever. Next year’s dividend is projected to be $1.73.

Answer 1

Answer :- IRR = 11.50%

Calculation :-