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 $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 $3.54 million per year and increased operating costs of $639,820.00 per year. Caspian Sea Drinks' marginal tax rate is 20.00%. 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-Residual value)/Useful Life

=(15,000,000/20)=$750000/year

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

=(3,540,000-639820)(1-0.2)+(0.2*750000)

=2470144

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

=2470144/1.08+2470144/1.08^2+2470144/1.08^3+2470144/1.08^4+2470144/1.08^5+2470144/1.08^6+2470144/1.08^7+2470144/1.08^8+2470144/1.08^9+2470144/1.08^10+2470144/1.08^11+2470144/1.08^12+2470144/1.08^13+2470144/1.08^14+2470144/1.08^15+2470144/1.08^16+2470144/1.08^17+2470144/1.08^18+2470144/1.08^19+2470144/1.08^20

=24252237.91

NPV=Present value of inflows-Present value of outflows

=24252237.91-15,000,000

=$9252237.91(Approx)