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 $3.89 million per year and increased operating costs of $679,041.00 per year. Caspian Sea Drinks' marginal tax rate is 25.00%. 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

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

Hence incremental cash flow=(Additional revenue-Increased operating cost)(1-tax rate)+Tax savings on Annual depreciation

=(3,890,000-679,041)(1-0.25)+(0.25*700000)

=$2583219.25/year

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

=2583219.25/1.08+2583219.25/1.08^2+2583219.25/1.08^3+2583219.25/1.08^4+2583219.25/1.08^5+2583219.25/1.08^6+2583219.25/1.08^7+2583219.25/1.08^8+2583219.25/1.08^9+2583219.25/1.08^10+2583219.25/1.08^11+2583219.25/1.08^12+2583219.25/1.08^13+2583219.25/1.08^14+2583219.25/1.08^15+2583219.25/1.08^16+2583219.25/1.08^17+2583219.25/1.08^18+2583219.25/1.08^19+2583219.25/1.08^20

=25362427.38

NPV=Present value of inflows-Present value of outflows

=25362427.38-14,000,000

=$11362427.38(Approx).