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:
- Revenues: $2.86 million = $2,860,000
- 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.
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