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 $1.77 million fully installed and has a 10 year life. It will be depreciated to a book value of $291,334.00 and sold for that amount in year 10.

b. The Engineering Department spent $28,911.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $15,808.00.

d. The PJX5 will reduce operating costs by $357,872.00 per year.

e. CSD’s marginal tax rate is 27.00%.

f. CSD is 71.00% equity-financed.

g. CSD’s 10.00-year, semi-annual pay, 6.19% coupon bond sells for $1,005.00.

h. CSD’s stock currently has a market value of $22.87 and Mr. Bensen believes the market estimates that dividends will grow at 2.78% forever. Next year’s dividend is projected to be $1.73.

Answer 1

Answer :- IRR = 12.38%

Calculation :-

Note : As we are required to calculate IRR, So Point f, g & h are irrelevant.