Question

Daily Enterprises is purchasing a $10.3 million machine. It will cost $47,000 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 $4.2 million per year along with incremental costs of $1.1 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 is what ? $ ​(Round to the nearest​ dollar.)

Answer 1

You need to calculate the after tax net annual earning.

1. Calculation of Depreciation:

Purchase Price = 10300000

Add: Installation = 47000

Total machine cost = 10347000

Depreciate in 5 years with no salvage value. So annual depreciation will be:

10347000 / 5 = 2069400.

2.Tax saving on depreciation = 2069400 x 0.35 =724290

3. Calculation of Net revenue

Revenue generation = 4200000

Less: Incremental cost = (1100000)

Net Revenue = 3100000

Less: Taxes @ 35% (1085000)

After Tax revenue = 2015000

4. Adding result of 2 and 3 you will get Net incremental earnings due to machine.

724290 + 2015000 = 2739290.