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 $2.16 million fully installed and has a 10 year life. It will be depreciated to a book value of $197,903.00 and sold for that amount in year 10.

b. The Engineering Department spent $44,218.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,179.00.

d. The PJX5 will reduce operating costs by $442,383.00 per year.

e. CSD’s marginal tax rate is 36.00%.

f. CSD is 74.00% equity-financed.

g. CSD’s 15.00-year, semi-annual pay, 5.52% coupon bond sells for $972.00.

h. CSD’s stock currently has a market value of $24.96 and Mr. Bensen believes the market estimates that dividends will grow at 2.66% forever. Next year’s dividend is projected to be $1.54.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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#20
Caspian Sea Drinks is considering the purchase of a new water filtration system produced by Rube Goldberg Machines. This new equipment, the RGM-7000, will allow Caspian Sea Drinks to expand production. It will cost $15.00 million fully installed and will be fully depreciated over a 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.67 million per year and increased operating costs of $579,799.00 per year. Caspian Sea Drinks' marginal tax rate is 20.00%. If Caspian Sea Drinks uses a 12.00% discount rate, then the net present value of the RGM-7000 is ___.

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Answer format: Currency: Round to: 2 decimal places.

Answer 1

PART 1

IRR= 15.53%

Formula

	Plum Juicer PJX5
		Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
	Reduction in cost		4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00
36%	Tax		1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88	1,59,257.88
	Net Cost Benefit		2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12	2,83,125.12
	Change in NWC (inventory- payables)	15.00
	Capex (equipment)	21,60,000.00										-1,97,903.00
	Capex (Redesign floor)	18,179.00
	Capex (R&D)	44,218.00
	FCF	-22,22,412.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	4,42,383.00	6,40,286.00
	IRR	15.53%

PART B

NPV= 12350446.1

Formula:

Water Filteration System
	Year 0	Year 1 to 20
Additional Revenue		36,70,000.00
Additional Operating Cost		5,79,799.00
Additional Profits		30,90,201.00
Tax		6,18,040.20
Incremental Operating Cash Flows		24,72,160.80
Change in NWC (inventory- payables)	15.00
Capex (equipment)	1,50,00,000.00
Capex (Redesign floor)	18,179.00
Capex (R&D)	44,218.00
FCF	-1,50,62,412.00	36,70,000.00
Discount Rate	12%
NPV	₹ 1,23,50,446.10
IRR	24.04%