Question

#2 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? unanswered not submitted Attempts Remaining: 5 a. The PJX5 will cost $1.83 million fully installed and has a 10 year life. It will be depreciated to a book value of $170,921.00 and sold for that amount in year 10. b. The Engineering Department spent $45,443.00 researching the various juicers. c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $21,753.00. d. The PJX5 will reduce operating costs by $371,143.00 per year. e. CSD's marginal tax rate is 30.00%. f. CSD is 55.00% equity-financed. g. CSD's 16.00-year, semi-annual pay, 6.90% coupon bond sells for $1,023.00. h. CSD's stock currently has a market value of $23.78 and Mr. Bensen believes the market estimates that dividends will grow at 3.28% forever. Next year's dividend is projected to be $1.41. Submit 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))

Answer 1

A D G 1 B с E H IF ANY QUERY, FEEL FREE TO ASK THEM AND GET RESOLVED 2 Solution 3 4 in 1 Initial Outlay PJX5 cost + floor cost = 1830000 + 21753 = 1851753 6 7 Note: Research cost is sunk cost, hence ignored 8 9 2 Depreciation (Cost-salvage) / Life (1830000-170921) / 10 = 165907.90 10 11 3 Cashflow operation (operating cost saving - Depreciation) x (1-tax rate) + Depreciation (371143 - 165907.90) x (1-30%) + 165907.90 = 309572.47 12 13 14 4 Calculate IRR 15 Year FCF 16 0 1 2 3 4 Cashflow Cashflow operation Juicer -1851753 309572.47 309572.47 309572.47 309572.47 309572.471 309572.47 309572.47 309572.47 309572.47 309572.47 170921 IRR 5 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 -1851753.00 309572.47 309572.47 309572.47 309572.47 309572.47 309572.471 309572.47 309572.47 309572.47 480493.47 11.39% 6 7 8 9 10 where, FCF = Cashflow operation + Cashflow Juicer =IRR(E17:E27) IRR Hence, IRR is 11.39% or 0.1139