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 $14.00 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 $2.66 million per year and increased operating costs of $641,124.00 per year. Caspian Sea Drinks' marginal tax rate is 20.00%. If Caspian Sea Drinks uses a 8.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer 1

Sales	2,660,000
Costs	641,124
Depreciation	700,000
EBT	1,318,876
Tax (20%)	263,775
Net Income	1,055,101
Cash Flows	1,755,101
PV	$17,231,838
NPV	$3,231,838

Depreciation = 14m / 20 years

Cash Flows = Net Income + Depreciation

Present Value (PV) of cash flows can be calculated using PV function on a calculator

N = 20, I/Y = 8%, PMT = 1,755,101, FV = 0 => Compute PV = $17,231,838

NPV = PV - Investment = 17,231,838 - 14,000,000 = $3,231,838