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Caspian Sea Drinks is considering the purchase of a new

April 15, 2022

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 $3.03 million per year and increased operating costs of $642,252.00 per year. Caspian Sea Drinks’ marginal tax rate is 31.00%. The internal rate of return for the RGM-7000 is _____.

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 $2.87 million per year and increased operating costs of $620,033.00 per year. Caspian Sea Drinks’ marginal tax rate is 33.00%. If Caspian Sea Drinks uses a 9.00% discount rate, then the net present value of the RGM-7000 is _____.

Caspian Sea Drinks’ is financed with 65.00% equity and the remainder in debt. They have 12.00-year, semi-annual pay, 5.72% coupon bonds which sell for 97.78% of par. Their stock currently has a market value of $25.26 and Mr. Bensen believes the market estimates that dividends will grow at 3.27% forever. Next year’s dividend is projected to be $2.75. Assuming a marginal tax rate of 35.00%, what is their WACC (weighted average cost of capital)?

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