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 $2.71 million per year and increased operating costs of $672,648.00 per year. Caspian Sea Drinks' marginal tax rate is 29.00%. 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-Salvage value)/useful Life

=(14,000,000/20)=$700000

Incremental cash flow=(Additional revenues-Increased operating cost)(1-tax rate)+Tax savings on Annual depreciation

=(2,710,000-672,648)(1-0.29)+(0.29*700000)

=1649519.92

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

=1649519.92/1.12+1649519.92/1.12^2+1649519.92/1.12^3+1649519.92/1.12^4+1649519.92/1.12^5+1649519.92/1.12^6+1649519.92/1.12^7+1649519.92/1.12^8+1649519.92/1.12^9+1649519.92/1.12^10+1649519.92/1.12^11+1649519.92/1.12^12+1649519.92/1.12^13+1649519.92/1.12^14+1649519.92/1.12^15+1649519.92/1.12^16+1649519.92/1.12^17+1649519.92/1.12^18+1649519.92/1.12^19+1649519.92/1.12^20

=12320996.05

NPV=Present value of inflows-Present value of outflows

=12320996.05-14,000,000

=-1679003.95(Approx)(Negative).