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 $2.70 million per year and increased operating costs of $500,110.00 per year. Caspian Sea Drinks' marginal tax rate is 28.00%. 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)=$750,000/year

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

=(2,700,000-500,110)(1-0.28)+(0.28*750,000)

=1793920.8

Present value of inflows=cash inflow*Present value of discounting factor(rate%,time period)

=1793920.8/1.12+1793920.8/1.12^2+1793920.8/1.12^3+1793920.8/1.12^4+1793920.8/1.12^5+1793920.8/1.12^6+1793920.8/1.12^7+1793920.8/1.12^8+1793920.8/1.12^9+1793920.8/1.12^10+1793920.8/1.12^11+1793920.8/1.12^12+1793920.8/1.12^13+1793920.8/1.12^14+1793920.8/1.12^15+1793920.8/1.12^16+1793920.8/1.12^17+1793920.8/1.12^18+1793920.8/1.12^19+1793920.8/1.12^20

=13399590.28

NPV=Present value of inflows-Present value of outflows

=13399590.28-15,000,000

=$-1600409.72(Approx)(Negative).