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 $14.00 million fully installed and will be fully depreciated over a 20.00 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $2.86 million per year and increased operating costs of $623,958.00 per year. Caspian Sea Drinks' marginal tax rate is 20.00%. The incremental cash flows for produced by the RGM-7000 are _____.

Answer 1

To calculate the incremental cash flows produced by the RGM-7000, we need to consider the additional revenues, increased operating costs, depreciation, and taxes.

### Step 1: Calculate the depreciation expense

The cost of the RGM-7000 is $14 million and will be depreciated over 20 years.

\[
\text{Depreciation Expense} = \frac{\text{Cost}}{\text{Life}} = \frac{14,000,000}{20} = 700,000 \text{ per year}
\]

### Step 2: Calculate taxable income

Now, we will calculate the taxable income, which is the difference between revenues and costs before taxes:

1. **Revenues:** $2.86 million = $2,860,000
2. **Operating Costs:** $623,958

\[
\text{Taxable Income} = \text{Revenues} - \text{Operating Costs} - \text{Depreciation}
\]
\[
\text{Taxable Income} = 2,860,000 - 623,958 - 700,000 = 1,536,042
\]

### Step 3: Calculate taxes

Now, let's calculate the taxes based on the taxable income:

\[
\text{Taxes} = \text{Taxable Income} \times \text{Tax Rate} = 1,536,042 \times 0.20 = 307,208.40
\]

### Step 4: Calculate the net income

Now we can calculate the net income:

\[
\text{Net Income} = \text{Taxable Income} - \text{Taxes} = 1,536,042 - 307,208.40 = 1,228,833.60
\]

### Step 5: Calculate the incremental cash flows

Since depreciation is a non-cash expense, we add it back to the net income to calculate the incremental cash flows:

\[
\text{Incremental Cash Flow} = \text{Net Income} + \text{Depreciation}
\]
\[
\text{Incremental Cash Flow} = 1,228,833.60 + 700,000 = 1,928,833.60
\]

### Conclusion

The incremental cash flows produced by the RGM-7000 are approximately **$1,928,833.60 per year**.