To calculate the incremental cash flows associated with the purchase of the RGM-7000 water filtration system, we need to consider the following components:
- Revenues: Additional annual revenues generated by the system.
- Operating Costs: Any additional annual costs incurred from operating the system.
- Depreciation: The tax shield provided by the depreciation of the asset.
- 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
-
Calculate Depreciation: \[ \text{Annual Depreciation} = \frac{\text{Cost}}{\text{Lifespan}} = \frac{14,000,000}{20} = 700,000 \text{ per year} \]
-
Calculate the Taxable Income: \[ \text{Taxable Income} = \text{Revenue} - \text{Operating Costs} - \text{Depreciation} \] Substituting in the values: \[ \text{Taxable Income} = 2,860,000 - 623,958 - 700,000 = 1,536,042 \]
-
Calculate Taxes: \[ \text{Taxes} = \text{Taxable Income} \times \text{Tax Rate} = 1,536,042 \times 0.20 = 307,208.40 \]
-
Calculate Net Income: \[ \text{Net Income} = \text{Taxable Income} - \text{Taxes} = 1,536,042 - 307,208.40 = 1,228,833.60 \]
-
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).
1 answer