Question

A. 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 $2.72 million per year and increased operating costs of $644,288.00 per year. Caspian Sea Drinks' marginal tax rate is 32.00%. If Caspian Sea Drinks uses a 9.00% discount rate, then the net present value of the RGM-7000 is _____.

B. Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.66 million and create incremental cash flows of $532,580.00 each year for the next five years. The cost of capital is 11.13%. What is the internal rate of return for the J-Mix 2000?

C. Caspian Sea Drinks is considering buying the J-Mix 2000. It will allow them to make and sell more product. The machine cost $1.90 million and create incremental cash flows of $642,799.00 each year for the next five years. The cost of capital is 11.97%. What is the profitability index for the J-Mix 2000?

Answer 1

A)