solution

1.)

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 15.00 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.82 million per year and increased operating costs of $714,268.00 per year. Caspian Sea Drinks’ marginal tax rate is 20.00%. The incremental cash flows for produced by the RGM-7000 are _____.

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 $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 $3.19 million per year and increased operating costs of $751,198.00 per year. Caspian Sea Drinks’ marginal tax rate is 34.00%. The internal rate of return for the RGM-7000 is _____.

3.)

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 20 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.69 million per year and increased operating costs of $614,842.00 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 _____.

4.)

Caspian Sea Drinks’ is financed with 66.00% equity and the remainder in debt. They have 11.00-year, semi-annual pay, 5.27% coupon bonds which sell for 98.63% of par. Their stock currently has a market value of $25.91 and Mr. Bensen believes the market estimates that dividends will grow at 3.93% forever. Next year’s dividend is projected to be $2.52. Assuming a marginal tax rate of 20.00%, what is their WACC (weighted average cost of capital)?