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 $2.82 million per year and increased operating costs of $630,978.00 per year. Caspian Sea Drinks' marginal tax rate is 29.00%. 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 1

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

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

OCF=(Additional revenues-Increased operating costs)(1-tax rate)+Tax savings on annual depreciation

=(2,820,000-630,978)(1-0.29)+(0.29*700000)

=1757205.62

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

=1757205.62/1.1+1757205.62/1.1^2+1757205.62/1.1^3+1757205.62/1.1^4+1757205.62/1.1^5+1757205.62/1.1^6+1757205.62/1.1^7+1757205.62/1.1^8+1757205.62/1.1^9+1757205.62/1.1^10+1757205.62/1.1^11+1757205.62/1.1^12+1757205.62/1.1^13+1757205.62/1.1^14+1757205.62/1.1^15+1757205.62/1.1^16+1757205.62/1.1^17+1757205.62/1.1^18+1757205.62/1.1^19+1757205.62/1.1^20

=14960082.01

NPV=Present value of inflows-Present value of outflows

=14960082.01-14,000,000

=$960082.01(Approx).