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 $12.00 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 $3.25 million per year and increased operating costs of $694,646.00 per year. Caspian Sea Drinks' marginal tax rate is 25.00%. If Caspian Sea Drinks uses a 10.00% discount rate, then the net present value of the RGM-7000 is _____. (round to 2 decimal places).
Answer :
Net Present Value = Present value of cash inflows - Present value of cash outflows
| Sales | 3,250,000 |
| Operating Costs | 694,646 |
| Depreciation | 600,000 |
| Income before tax | 1,955,354 |
| Less : tax | 488,838.5 |
| Net income | 1,466,515.5 |
| Add : Depreciation | 600,000 |
| Annual OCF | 2,066,515.5 |
| PVAF ( 10%,20 ) | 8.5136 |
| Present value of cash inflows | 17,593,486.36 |
| Less : Investment |
12,000,000 |
| NPV | 5,593,486.36 |
The Net Present Value of the RGM-7000 is 5,593,486.36.
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