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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 18.00 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 $725,225.00 per year. Caspian Sea Drinks' marginal tax rate is 30.00%. The incremental cash flows for produced by the RGM-7000 are _____.

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To calculate the incremental cash flows from the RGM-7000, we need to determine the additional cash flows generated from operating the machine, accounting for additional revenues, operating costs, depreciation, and taxes.

  1. Calculate Annual Depreciation: \[ \text{Annual Depreciation} = \frac{\text{Cost of RGM-7000}}{\text{Life of RGM-7000}} = \frac{15,000,000}{18} \approx 833,333.33 \]

  2. Calculate Pre-Tax Income: \[ \text{Pre-Tax Income} = \text{Additional Revenues} - \text{Increased Operating Costs} - \text{Annual Depreciation} \] \[ \text{Pre-Tax Income} = 2,820,000 - 725,225 - 833,333.33 \approx 1,261,441.67 \]

  3. Calculate Taxes: \[ \text{Taxes} = \text{Pre-Tax Income} \times \text{Tax Rate} \] \[ \text{Taxes} = 1,261,441.67 \times 0.30 \approx 378,432.50 \]

  4. Calculate Net Income: \[ \text{Net Income} = \text{Pre-Tax Income} - \text{Taxes} \] \[ \text{Net Income} = 1,261,441.67 - 378,432.50 \approx 882,909.17 \]

  5. Calculate Incremental Cash Flows (Adding Back Depreciation): Since depreciation is a non-cash expense, we need to add it back to the net income to obtain the incremental cash flows: \[ \text{Incremental Cash Flows} = \text{Net Income} + \text{Annual Depreciation} \] \[ \text{Incremental Cash Flows} = 882,909.17 + 833,333.33 \approx 1,716,242.50 \]

The incremental cash flows produced by the RGM-7000 are approximately $1,716,242.50 per year.