Question

24

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 $1.88 million fully installed and has a 10 year life. It will be depreciated to a book value of $214,065.00 and sold for that amount in year 10.

b. The Engineering Department spent $33,355.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,443.00.

d. The PJX5 will reduce operating costs by $453,490.00 per year.

e. CSD’s marginal tax rate is 21.00%.

f. CSD is 63.00% equity-financed.

g. CSD’s 17.00-year, semi-annual pay, 5.94% coupon bond sells for $987.00.

h. CSD’s stock currently has a market value of $23.09 and Mr. Bensen believes the market estimates that dividends will grow at 2.60% forever. Next year’s dividend is projected to be $1.77.

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))

#2 Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $28.00 million. The plant and equipment will be depreciated over 10 years to a book value of $2.00 million, and sold for that amount in year 10. Net working capital will increase by $1.25 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.06 million per year and cost $2.04 million per year over the 10-year life of the project. Marketing estimates 13.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 26.00%. The WACC is 13.00%. Find the NPV (net present value).

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

#3 Caspian Sea Drinks is considering the production of a diet drink. The expansion of the plant and the purchase of the equipment necessary to produce the diet drink will cost $22.00 million. The plant and equipment will be depreciated over 10 years to a book value of $3.00 million, and sold for that amount in year 10. Net working capital will increase by $1.38 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.23 million per year and cost $2.35 million per year over the 10-year life of the project. Marketing estimates 15.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 21.00%. The WACC is 14.00%. Find the IRR (internal rate of return).

Answer 1

IRR of PJX5

M ol 18,80,000 33,355 18,443 19,31,798 2 IRR for PXJ5 3 Year 4 Cost (1) 5 Research cost (2) 6 Redesigning cost (3) 7 Total Outflow (4) =1+2+3 8 Cost saving (5) 9 Salvage Value (6) 10 Total Inflow (7) =5+6 11 Net cash flow (8)=7-4 12 13 IRR 14 453490 453490 453490 453490 453490 453490 453490 453490 453490 453490 214065 667555 6,67,555 453490 453490 4,53,490 453490 4,53,490 L 453490 4,53,490 453490 4,53,490 453490 4,53,490 453490 4,53,490 453490 4,53,490 453490 4,53,490 -19,31,798 4,53,490 20.06%

NPV for Diet Drink expansion

WACC 13% 2,80,00,000 12,50,000 2,92,50,000 90,60,000 16 17 Diet Drink NPV 18 Year 19 Purchase cost (1) 20 Working capital (2) 21 Cash outflow (3)=1+2 22 Revenue (4) 23 Cost (5) 24 Operating cost (6)=4-5 25 Salvage Value (7) 26 Working capital (8) 27 Cash Inflow (9)=6+7+8 28 Net cash flow (10)=9-3 29 Net Present Value(11) 30 NPV 31 90,60,000 20,40,000 70,20,000 90,60,000 20,40,000 70,20,000 90,60,000 20,40,000 I 70,20,000 90,60,000 20,40,000 70,20,000 90,60,000 20,40,000 70,20,000 90,60,000 20,40,000 70,20,000 90,60,000 20.40.000 70,20,000 90,60,000 20.40.000 70,20,000 70,20,000 90,60,000 20,40,000 70,20,000 20,00,000 12,50,000 1,02,70,000 1,02,70,000 30,25,422 1-2,92,50,000 -2,92,50,000 97,99,641 70,20,000 70,20,000 62,12,389 70,20,000 70,20,000 54,97,690 70,20,000 70,20,000 48,65,212 70,20,000 70,20,000 43,05,497 7 0,20,000 70,20,000 38,10,175 70,20,000 70,20,000 33,71,836 70,20,000 70,20,000 29,83,926 70,20,000 70,20,000 26,40,642 70,20,000 70,20,000 23,36,852 =C28/(1+$C$17)^C18 =SUM(B29:L29)

IRR for Diet Drink expansion

2,20,00,000 13,80,000 2,33,80,000 34 35 Diet Drink IRR 36 Year 37 Purchase cost (1) 38 Working capital (2) 39 Cash outflow (3)=1+2 40 Revenue (4) 41 Cost (5) 42 Operating cost (6)=4-5 43 Salvage Value (7) 44 Working capital (8) 45 Cash Inflow (9)=6+7+8 46 Net Cash flow (10)=9-3 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 92,30,000 23,50,000 68,80,000 30,00,000 13,80,000 1,12,60,000 1,12,60,000 =C45-C39 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 68,80,000 -2,33,80,000 68,80,000 48 IRR 27.24% =IRR(B46:L46) 49

I have used excel formulas for IRR, all working is given in the picture of excel.

For NPV just shown the 1st year formula as its same for all other years.