Question

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 $3.28 million per year and increased operating costs of $621,701.00 per year. Caspian Sea Drinks' marginal tax rate is 25.00%. If Caspian Sea Drinks uses a 12.00% discount rate, then the net present value of the RGM-7000 is ________.

Answer 1

Annual depreciation=(Cost-Residual value)/Useful Life

=(15,000,000/20)=$750000

Hence OCF=(Additional revenues-Additional costs)(1-tax rate)+Tax savings on Annual depreciation

=(3,280,000-621,701)(1-0.25)+(0.25*750000)

=2181224.25

Present value of annuity=Annuity[1-(1+interest rate)^-time period]/rate

=2181224.25[1-(1.12)^-20]/0.12

=2181224.25*7.46944362

=16292531.57

NPV=Present value of inflows-Present value of outflows

=16292531.57-15,000,000

=$1292531.57(Approx).