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 $3.15 million per year and increased operating costs of $590,816.00 per year. Caspian Sea Drinks' marginal tax rate is 34.00%. If Caspian Sea Drinks uses a 10.00% discount rate, then the net present value of the RGM-7000 is _____.

Answer 1

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

=(12,000,000/20)=$600,000

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

=(3,150,000-590,816)(1-0.34)+(0.34*600,000)

=1893061.44

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

=1893061.44/1.1+1893061.44/1.1^2+1893061.44/1.1^3+1893061.44/1.1^4+1893061.44/1.1^5+1893061.44/1.1^6+1893061.44/1.1^7+1893061.44/1.1^8+1893061.44/1.1^9+1893061.44/1.1^10+1893061.44/1.1^11+1893061.44/1.1^12+1893061.44/1.1^13+1893061.44/1.1^14+1893061.44/1.1^15+1893061.44/1.1^16+1893061.44/1.1^17+1893061.44/1.1^18+1893061.44/1.1^19+1893061.44/1.1^20

=16116699.2

NPV=Present value of inflows-Present value of outflows

=16116699.2-12,000,000

=$4116699.2(Approx).