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 $2.19 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).

Answer 1

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%

Year	Cash-flows
0	-2248486
1	318,156
2	318,156
3	318,156
4	318,156
5	318,156
6	318,156
7	318,156
8	318,156
9	318,156
10	436,903
IRR	7.43%