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 18.00 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.69 million per year and increased operating costs of $670,956.00 per year. Caspian Sea Drinks' marginal tax rate is 35.00%. The incremental cash flows for produced by the RGM-7000 are _____.

Answer format: Currency: Round to: 2 decimal places.

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 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.91 million per year and increased operating costs of $741,724.00 per year. Caspian Sea Drinks' marginal tax rate is 29.00%. The internal rate of return for the RGM-7000 is _____.

 Answer format: Percentage Round to: 4 decimal places (Example: 9.2434%, % sign required. Will accept decimal format rounded to 6 decimal places (ex: 0.092434))

I would really appreciate the Help!! :) would be great if you could all steps (not excel) for better understanding~ Thank You

Answer 1

1.

Incremental cash flows for produced by the RGM-7000
	Amount
Additional revenues	26,90,000
Less:increased operating costs	6,70,956
Less: Depreciation   (15000000/18)	8,33,333
PBT	11,85,711
Less: Tax @ 35%	4,14,999
PAT	7,70,712
Add: Depreciation	8,33,333
Incremental annual cash flows	16,04,045

2.

Internal Rate of return can be calculated with below formula

(NPV1 X (R2 - R1) IRR = R1 + (NPV - NPV2)

Where:

R₁, R_{2 =} randomly selected discount rates

NPV₁= Higher Net present value

NPV₂= Lower Net present value

Lets first calculate Incremental cash flow

Incremental cash flows for produced by the RGM-7000
	Amount
Additional revenues	29,10,000
Less:increased operating costs	7,41,724
Less: Depreciation   (14000000/15)	9,33,333
PBT	12,34,943
Less: Tax @ 29%	3,58,133
PAT	8,76,809
Add: Depreciation	9,33,333
Incremental annual cash flows	18,10,143

Now lets take R₁=9% and R₂=10%

Now we need to calculate NPV₁ and NPV₂

Year	Cash Flow	PV factor @ 9%	PV @ 9%	PV factor @ 10%	PV @ 10%
0	-14000000	1	-14000000	1	-14000000
1	1810143	0.91743119	1660682	0.90909091	1645585
2	1810143	0.84167999	1523561	0.82644628	1495986
3	1810143	0.77218348	1397763	0.75131480	1359987
4	1810143	0.70842521	1282351	0.68301346	1236352
5	1810143	0.64993139	1176469	0.62092132	1123956
6	1810143	0.59626733	1079329	0.56447393	1021779
7	1810143	0.54703424	990210	0.51315812	928890
8	1810143	0.50186628	908450	0.46650738	844445
9	1810143	0.46042778	833440	0.42409762	767677
10	1810143	0.42241081	764624	0.38554329	697888
11	1810143	0.38753285	701490	0.35049390	634444
12	1810143	0.35553473	643569	0.31863082	576767
13	1810143	0.32617865	590430	0.28966438	524334
14	1810143	0.29924647	541679	0.26333125	476667
15	1810143	0.27453804	496953	0.23939205	433334
		NPV1	590999	NPV2	-231908

IRR = 9+ (590999 x (10 – 9) (590999 - (-231908))

(590999 x (1) IRR = 9+ (822907)

IRR = 9+0.718184

IRR = 9.718184