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 $3.43 million per year and increased operating costs of $597,604.00 per year. Caspian Sea Drinks' marginal tax rate is 33.00%. If Caspian Sea Drinks uses a 8.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer 1

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

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

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

=(3,430,000-597,604)(1-0.33)+(0.33*600000)

=$2095705.32/year

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

=2095705.32/1.08+2095705.32/1.08^2+2095705.32/1.08^3+2095705.32/1.08^4+2095705.32/1.08^5+2095705.32/1.08^6+2095705.32/1.08^7+2095705.32/1.08^8+2095705.32/1.08^9+2095705.32/1.08^10+2095705.32/1.08^11+2095705.32/1.08^12+2095705.32/1.08^13+2095705.32/1.08^14+2095705.32/1.08^15+2095705.32/1.08^16+2095705.32/1.08^17+2095705.32/1.08^18+2095705.32/1.08^19+2095705.32/1.08^20

=20575943.75

NPV=Present value of inflows-Present value of outflows

=20575943.75-12,000,000

=$8575943.75(Approx)