Question

Daily Enterprises is purchasing a $10 million machine. It will cost $50,000 to transport and install the machine. The machine will be depreciated straight-line to zero over its five-year life. What are the depreciation expenses associated with this machine per year?

2,010,000

The machine in #11 will generate incremental revenues of $4 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 (after-tax) earnings associated with the new machine?

What are the incremental operating cash flows associated with the new machine?

Answer 1

Answer a

cost of machine = purchasse price + transport cost

=10000000+50000

=10050000

Straight line method depreiciation = (cost of asset-residual value)/useful life

(10050000-0)/5

=2010000

So depreciation expenses is 2010000

b.

calculation of Incremental After tax earnings:

Incremental reveneu...................4000000

less: cost..................................-1200000

less: depreciation.......................-2010000

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before tax earnings.........................790000

less:tax @35%.............................-276500

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After tax earnings...........................513500

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So aftertax earnings is 513500

C.

calculation of Operating cash flows:

After tax earnings..........................513500

Add: depreciation.........................2010000

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Operating cash flow.......................2523500

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So OCF is 2523500