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 $3.82 million per year and increased operating costs of $574,451.00 per year. Caspian Sea Drinks' marginal tax rate is 22.00%. If Caspian Sea Drinks uses a 9.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer 1

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

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

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

=(3,820,000-574,451)(1-0.22)+(0.22*700000)

=2685528.22

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

=2685528.22/1.09+2685528.22/1.09^2+2685528.22/1.09^3+2685528.22/1.09^4+2685528.22/1.09^5+2685528.22/1.09^6+2685528.22/1.09^7+2685528.22/1.09^8+2685528.22/1.09^9+2685528.22/1.09^10+2685528.22/1.09^11+2685528.22/1.09^12+2685528.22/1.09^13+2685528.22/1.09^14+2685528.22/1.09^15+2685528.22/1.09^16+2685528.22/1.09^17+2685528.22/1.09^18+2685528.22/1.09^19+2685528.22/1.09^20

=24,514,967

NPV=Present value of inflows-Present value of outflows

=24,514,967-14,000,000

=$10514967(Approx).