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 $1.59 million fully installed and has a 10 year life. It will be depreciated to a book value of $198,416.00 and sold for that amount in year 10.

b. The Engineering Department spent $30,497.00 researching the various juicers.

c. Portions of the plant floor have been redesigned to accommodate the juicer at a cost of $18,386.00.

d. The PJX5 will reduce operating costs by $369,370.00 per year.

e. CSD’s marginal tax rate is 28.00%.

f. CSD is 58.00% equity-financed.

g. CSD’s 19.00-year, semi-annual pay, 6.16% coupon bond sells for $966.00.

h. CSD’s stock currently has a market value of $24.32 and Mr. Bensen believes the market estimates that dividends will grow at 2.66% forever. Next year’s dividend is projected to be $1.78.

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))

unanswered

not_submitted

#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 $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 $1.48 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.41 million per year and cost $2.18 million per year over the 10-year life of the project. Marketing estimates 12.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 35.00%. The WACC is 13.00%. Find the NPV (net present value).

Submit

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

unanswered

not_submitted

#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 $25.00 million. The plant and equipment will be depreciated over 10 years to a book value of $1.00 million, and sold for that amount in year 10. Net working capital will increase by $1.13 million at the beginning of the project and will be recovered at the end. The new diet drink will produce revenues of $9.43 million per year and cost $1.86 million per year over the 10-year life of the project. Marketing estimates 19.00% of the buyers of the diet drink will be people who will switch from the regular drink. The marginal tax rate is 32.00%. The WACC is 13.00%. Find the IRR (internal rate of return).

Submit

Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

unanswered

not_submitted

Answer 1

Number 1 IRR Calculation

The Engineering Department spent $30,497.00 researching the various juicers will not be considered into calculation of NPV or IRR as these spends are related to R&D and not related to this plant or machinery.

As plant will reduce operating costs by $369,370.00 per year so we need to adjust loss of tax benefit so net operating cash from reduction of the cost is $369,370.00 * (1 - 0.28) = 265946.4

IRR is a point where NPV of cash inflows and outflows is Zero

	0	1	2	3	4	5	6	7	8	9	10
Saving in Operating Cost		265946.4	265946.4	265946.4	265946.4	265946.4	265946.4	265946.4	265946.4	265946.4	265946.4
Cost	-1590000
Floor Redesigne Exp	-18386
IRR = 10.371% where NPV	0

Note: Please know as per HOMEWORKLIB POLICY we can only answer one questions if there is no sub question and next question is new so I would request you to repost the remaining questions one by one we would be happy to answer it. Hope you understand it.

Thanks and have a good day.