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 $12.00 million fully installed and will be fully depreciated over a 19.00 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.10 million per year and increased operating costs of $636,297.00 per year. Caspian Sea Drinks' marginal tax rate is 22.00%. The incremental cash flows for produced by the RGM-7000 are _____.

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 $15.00 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 $2.56 million per year and increased operating costs of $607,209.00 per year. Caspian Sea Drinks' marginal tax rate is 31.00%. If Caspian Sea Drinks uses a 8.00% discount rate, then the net present value of the RGM-7000 is _____.

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 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.28 million per year and increased operating costs of $664,591.00 per year. Caspian Sea Drinks' marginal tax rate is 32.00%. The internal rate of return for the RGM-7000 is _____.

Thanks!

Answer 1

1.

Compute the incremental cash flows, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the incremental cash flows are $2,060,635.708.

2.

Compute the PVIFA at 8% and 20 years, using the equation as shown below:

PVIFA = {1 – (1 + Rate)^{-Number of periods}}/ Rate

                   = {1 – (1 + 0.08)^-20}/ 8%

            = (1 – 0.214548)/ 8%

            = 9.818147

Hence, the PVIFA at 8% and 20 years is 9.818147.

Compute the Net present value (NPV), using the equation as shown below:

The result of the above excel table is as follows:

Hence, the NPV is $511,943.66.

3.

Compute the incremental cash flows, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the incremental cash flows are $2,077,144.787.

Compute the internal rate of return (IRR), using the equation as shown below:

Initial investment = Annual incremental cash flows*{1 – (1 + Rate)^{-Number of periods}}/ Rate

        $14,000,000 = $2,077,144.787*{1 – (1 + Rate)^-14}/ Rate

Rearrange the above equation to solve the value of value of R, which represents the internal rate of return, as follows:

{1 – (1 + Rate)^-14} = ($14,000,000/$2,077,144.787)*Rate

1 – {1/ (1 + Rate)¹⁴} = 6.7400212Rate

After solving the above equation, the internal rate of return comes out to be 12.19646%.