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 $2.34 million fully installed and has a 10 year life. It will be depreciated to a book value of $182,297.00 and sold for that amount in year 10. b. The Engineering Department spent $34,199.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $17,376.00. d. The PJX5 will reduce operating costs by $380,281.00 per year. e. CSD’s marginal tax rate is 35.00%. f. CSD is 55.00% equity-financed. g. CSD’s 15.00-year, semi-annual pay, 6.50% coupon bond sells for $987.00. h. CSD’s stock currently has a market value of $24.46 and Mr. Bensen believes the market estimates that dividends will grow at 2.10% forever. Next year’s dividend is projected to be $1.46

Answer 1

Year	0	1	2	3	4	5	6	7	8	9	10
Initial cost	-2340000
After-tax Sale value at end yr.10(182297*(1-35%))											118493.05
Depn. Tax shield at (2340000-182297)/10yrs.*35%		75519.605	75519.61	75519.61	75519.61	75519.61	75519.61	75519.61	75519.61	75519.61	75519.605
One-time after-tax plant-floor redesigning costs(17376*(1-35%))	-11294.40
After-tax reduction in opg. Costs(380281*(1-35%))		247182.65	247182.65	247182.65	247182.65	247182.65	247182.65	247182.65	247182.65	247182.65	247182.65
Total incremental cashflows	-2351294	322702.26	322702.3	322702.3	322702.3	322702.3	322702.3	322702.3	322702.3	322702.3	441195.31
IRR of the above cash flows	6.78%