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 $13.00 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 $3.37 million per year and increased operating costs of $595,636.00 per year. Caspian Sea Drinks' marginal tax rate is 20.00%. If Caspian Sea Drinks uses a 10.00% discount rate, then the net present value of the RGM-7000 is _____. Round to two decimal places

Answer 1

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

=(13,000,000/20)=$650000

Hence incremental cash flow=(Additional revenue-Increased operating cost)(1-tax rate)+Tax savings on Annual depreciation

=(3,370,000-595,636)(1-0.2)+(0.2*650000)

=$2349491.2/year

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

=2349491.2/1.1+2349491.2/1.1^2+2349491.2/1.1^3+2349491.2/1.1^4+2349491.2/1.1^5+2349491.2/1.1^6+2349491.2/1.1^7+2349491.2/1.1^8+2349491.2/1.1^9+2349491.2/1.1^10+2349491.2/1.1^11+2349491.2/1.1^12+2349491.2/1.1^13+2349491.2/1.1^14+2349491.2/1.1^15+2349491.2/1.1^16+2349491.2/1.1^17+2349491.2/1.1^18+2349491.2/1.1^19+2349491.2/1.1^20

=20002543.04

NPV=Present value of inflows-Present value of outflows

=20002543.04-13,000,000

=$7002543.04(Approx).