Question

#2 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 15 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.08 million per year and increased operating costs of $695,817.00 per year. Caspian Sea Drinks' marginal tax rate is 29.00%. The intemal rate of return for the RGM-7000 is Submit 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)) 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 $13.00 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 $3.51 million per year and increased operating costs of $675,745.00 per year. Caspian Sea Drinks' marginal tax rate is 24.00%. If Caspian Sea Drinks uses a 8.00% discount rate, then the net present value of the RGM-7000 is Submit Answer format: Currency: Round to: 2 decimal places

Answer 1

Solution:-

First To Calculate Operating Cash Flows-

Statement of Cash flows After Tax
Year	0	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
Initial Cost	($120,00,000)
Sales		$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000	$30,80,000
Less: Cost		$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817	$6,95,817
Less :- Depreciation		$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000
Pre Tax Cash flows		$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183	$15,84,183
Less :- Tax @29%		$4,59,413	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255	$4,75,255
Net Operating Profit After Tax		$11,24,770	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928	$11,08,928
Add :- Depreciation		$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000	$8,00,000
Operating Cashflows	($120,00,000)	$19,24,770	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928	$19,08,928

To Calculate Internal Rate of Return-

A B с 2 3 IRR of the Project 4 5 Year 6 0 Cash Flows -12000000 1908928 7 1 8 2 1908928 9 3 1908928 10 4 11 5 1908928 1908928 1908928 1908928 12 6 13 7 14 8 1908928 1908928 15 9 16 10 1908928 1908928 17 11 18 12 1908928 19 13 1908928 20 14 1908928 21 15 1908928 22 23 IRR 13.54% 24 25 Formula IRR(B6:321) 26

IRR of the Project is 13.54%

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