Question

Daily Enterprises is purchasing a $ 10.2 million machine. It will cost $ 50,000 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 $ 3.8 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?

Answer 1

Compute the annual depreciation on the new machine, using the equation as shown below:

Annual depreciation = (Purchase cost of machine + Installation cost)/ Estimated life

                                = ($10,200,000 + $50,000)/ 5 years

                                 = $2,050,000

Hence, the annual depreciation is $2,050,000.

Compute the incremental income before taxes, using the equation as shown below:

Incremental income = Incremental revenues – Incremental costs – Depreciation

                                 = $3,800,000 - $1,200,000 - $2,050,000

                                 = $550,000

Hence, the incremental income before taxes is $550,000.

Compute the incremental income after taxes, using the equation as shown below:

Income after taxes = Income before taxes*(1 – Tax rate)

                             = $550,000*(1 – 0.35)

                             = $357,500

Hence, the income after taxes is $357,500.