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 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.96 million per year and increased operating costs of $697,888.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. If Caspian Sea Drinks uses a 9.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer format: Currency: Round to: 2 decimal places.

Answer 1

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

=(12,000,000/20)=$600000/year

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

=(2,960,000-697,888)(1-0.35)+(0.35*600000)

=1680372.8

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

=1680372.8/1.09+1680372.8/1.09^2+1680372.8/1.09^3+1680372.8/1.09^4+1680372.8/1.09^5+1680372.8/1.09^6+1680372.8/1.09^7+1680372.8/1.09^8+1680372.8/1.09^9+1680372.8/1.09^10+1680372.8/1.09^11+1680372.8/1.09^12+1680372.8/1.09^13+1680372.8/1.09^14+1680372.8/1.09^15+1680372.8/1.09^16+1680372.8/1.09^17+1680372.8/1.09^18+1680372.8/1.09^19+1680372.8/1.09^20

=15339359.85

NPV=Present value of inflows-Present value of outflows

=15339359.85-12,000,000

=$3339359.85(Approx).