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 $3.61 million per year and increased operating costs of $573,240.00 per year. Caspian Sea Drinks' marginal tax rate is 27.00%. If Caspian Sea Drinks uses a 11.00% discount rate, then the net present value of the RGM-7000 is_____?

Please show step by step

Answer 1

The following is the Excel Worksheets of NPV calculation for better understanding:-

The following is the Formula Sheet of the above excel worsheets to understand the formulas applied in the calculation:-

So, NPV of RGM-7000 is $ 4265956.84

( Notes:-

• Depreciation is calculated by dividing the cost of equipment by the number of useful years.
• Pre-tax cash flows are calculated by subtracting the operational cost and depreciation from the additional revenues.
• Post-tax cash flows are calculated ny subtracting the taxes from the pre-tax cash flows.
• Operating cash flows are calculated by adding back depreciation to post-tax cash flows as they are non-cash expenses.
• These operating cash flows are divided by discounting factor to arrive at the present value.
• Now, NPV is the difference between the present value of all cash inflows and the present value of initial investment.)