Question

Daily Enterprises is purchasing a $9.9 million machine. It will cost $52,000 to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. The machine will generate incremental revenues of$ 3.9 million per year along with incremental costs of $1.2 million per year. If​ Daily's marginal tax rate is 35%​, what are the incremental earnings​ (net income) associated with the new​machine?

The annual incremental earnings are $___. ​(Round to the nearest​ dollar.)

Answer 1

i) Annual depriciation = (Total cost of machine - Salvage value) / Life of machine

Here, Life of machine = 5 years,

Salvage value = 0

Total cost of machine = Purchase price + Transport & installation cost

Total cost of machine = $99,00,000 + $52,000

Total cost of machine = $99,52,000

Now,

Annual depriciation = ($99,52,000 - 0) / 5

Annual depriciation = $19,90,400

ii) Annual incremental earnings = (Incremental earnings per year - Incremental cost per year - Annual depriciation) * (1 - Tax rate)

Here,

Incremental earnings per year = $39,00,000

Incremental cost per year = $12,00,000

Annual depriciation (refer i above) = $19,90,400

Tax rate = 35% or 0.35

Now put the values into formula,

Annual incremental earnings = ($39,00,000 - $12,00,000 - $19,90,400) * (1 - 0.35)

Annual incremental earnings = $7,09,600 * 0.65

Annual incremental earnings = $4,61,240

Note : Depriciation is to be calculated on total cost of machine including installation costs.