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 associated with the purchase of the RGM-7000 water filtration system, we need to consider the following components:

1. **Revenues**: Additional annual revenues generated by the system.
2. **Operating Costs**: Any additional annual costs incurred from operating the system.
3. **Depreciation**: The tax shield provided by the depreciation of the asset.
4. **Tax Implications**: The impact of taxes on the additional income generated.

### Parameters

- **Cost of RGM-7000**: $14.00 million
- **Lifespan**: 20 years
- **Revenue per year**: $2.86 million
- **Operating Costs per year**: $623,958
- **Tax Rate**: 20%

### Calculation Steps

1. **Calculate Depreciation**:
\[
\text{Annual Depreciation} = \frac{\text{Cost}}{\text{Lifespan}} = \frac{14,000,000}{20} = 700,000 \text{ per year}
\]

2. **Calculate the Taxable Income**:
\[
\text{Taxable Income} = \text{Revenue} - \text{Operating Costs} - \text{Depreciation}
\]
Substituting in the values:
\[
\text{Taxable Income} = 2,860,000 - 623,958 - 700,000 = 1,536,042
\]

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

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

5. **Calculate Incremental Cash Flows**:
To get the incremental cash flows, we need to add back the non-cash depreciation expense:
\[
\text{Incremental Cash Flows} = \text{Net Income} + \text{Depreciation}
\]
Substituting in the values:
\[
\text{Incremental Cash Flows} = 1,228,833.60 + 700,000 = 1,928,833.60
\]

Thus, the incremental cash flows produced by the RGM-7000 are approximately **$1,928,834** per year (rounded to the nearest dollar).