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 $2.46 million fully installed and has a 10 year life. It will be depreciated to a book value of $171,635.00 and sold for that amount in year 10.

b. The Engineering Department spent $43,747.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $17,682.00.

d. The PJX5 will reduce operating costs by $412,884.00 per year.

e. CSD’s marginal tax rate is 38.00%.

f. CSD is 56.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 6.20% coupon bond sells for $1,043.00.

h. CSD’s stock currently has a market value of $21.47 and Mr. Bensen believes the market estimates that dividends will grow at 2.22% forever. Next year’s dividend is projected to be $1.71.

With steps if possible thanks

Answer 1

Cost of portion B will not be considered at all because it is sunk cost and it is irrelevant to take future decision.

Formulas used:-

Depriciation=(P678+P679-P680)/P681

Interest rate=(P678+P679)*0.45*5.24%
Profit before tax=P685-P686-P687
tax= P688 *0.38
Profit after tax=P688-P689
Net Cashflow=P690+P686
IRR=RATE(P681,P691,-P678-P679,P680)

I hope My efforts will be fruitful to you...