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 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.85 million per year and increased operating costs of $697,509.00 per year. Caspian Sea Drinks' marginal tax rate is 27.00%. The internal rate of return for the RGM-7000 is _____.

Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

Answer 1

Annual depreciation under SLM
Cost of equipment			14000000
Divide: Life of assets			15
Annual depreciation under SLM			933333.3
Incremental cashflows
Incremental revenue			2850000
Less: Incremental cost			697509
Less: Depreciation			933333.3
Net Income before tax			1219158
Less: tax @ 27%			329172.6
After tax Income			889985.1
Add: Depreciation			933333.3
Incremental cashflows			1823318
Multiply: Annuity fr15yrs at 9.836%			7.6778
Present value of inflows				13999074.2
Less: Initial investment				14000000
NPV				-925.75815
Therefore, IRR = 9.836%