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 $2.19 million fully installed and has a 10 year life. It will be depreciated to a book value of $118,747.00 and sold for that amount in year 10.
b. The Engineering Department spent $34,058.00 researching the various juicers.
c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $24,428.00.
d. The PJX5 will reduce operating costs by $318,156.00 per year.
e. CSD’s marginal tax rate is 30.00%.
f. CSD is 71.00% equity-financed.
g. CSD’s 18.00-year, semi-annual pay, 6.97% coupon bond sells for $955.00.
h. CSD’s stock currently has a market value of $23.30 and Mr. Bensen believes the market estimates that dividends will grow at 4.46% forever. Next year’s dividend is projected to be $1.57. ( round percentage to 2 decimal places).
We first chalk out all the cash-flows in excel
Initial cost = -2190000-34058-24428
Cash-flow in year 10 = Reduced operating cost + Salvage cost = 118747+318156
We calculate the IRR using IRR function in excel
IRR = IRR(All-cash flows)
IRR of PJX5 = 7.43%
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