Question

Daily Enterprises is purchasing a $9.9 million machine. It will cost $51,000 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 $ 1.4 million per year. If? Daily's marginal tax rate is 35 %?, what are the incremental earnings? (net income) associated with the new? machine?

a. The annual incremental earnings are ?$______. ?(Round to the nearest? dollar.)

Answer 1

Incremental earning is the excess of incremental revenue over the incremental costs after deducting the marginal tax.

Depreciation = (Cost + Installation) / Life years = (9,900,000 + 51,000) / 5 = $1,990,200

Incremental earnings = (Incremental revenues – Incremental costs - Depreciation) × (1 – tax rate)

                                   = ($3.9 million - $1.4 million - $1.9902) × (1 – 0.35)

                                    = $0.5098 million × 0.65

                                    = $0.33137 million

Since 1 million = 1,000,000

Incremental earnings = $0.33137 × 1,000,000

                                    = $331,370 (Answer)