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 17.00 year life, then removed for no cost. The RGM-7000 will result in additional revenues of $3.14 million per year and increased operating costs of $637,622.00 per year. Caspian Sea Drinks' marginal tax rate is 29.00%. The incremental cash flows for produced by the RGM-7000 are _____.

Answer 1

The incremental cash flows for produced by the RGM-7000

Annual Operating cash flow (OCF) = [(Revenue – Costs) x (1 – Tax rate)] + [Depreciation x Tax rate]

= [($3,140,000 - $637,622) x (1 – 0.29)] + [($14,000,000 / 17 Years) x 0.29]

= [$2,502,378 x 0.61] + [$823,529.41 x 0.29]

= $1,776,688.38 + $238,823.53

= $2,015,511.91 or

= $2,015,512 (Rounded to the nearest whole dollar)

Therefore, the incremental cash flows for produced by the RGM-7000 will be $2,015,512