Daily Enterprises is purchasing a $10.0 million machine. It will cost $50,000 to

ID: 2521476 • Letter: D

Question

Daily Enterprises is purchasing a $10.0 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 $4.0 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.)

Explanation / Answer

Solution:

Calculation of Incremental Net Income

Incremental Revenue

$4,000,000

Less: Incremental Cost

($1,200,000)

Incremental Profit before depreciation and tax

$2,800,000

Less: Depreciation on Machine (Refer Note 1)

($2,010,000)

Incremental Profit before tax

$790,000

Less: Income Tax @ 35%

($276,500)

Incremental Earnings (Net Income)

$513,500

Note --- If the answer is given in $ million, the answer will be $0.5135 Million

Note 1 --- Depreciation Expense

Cost of Asset = Machine Cost + Installation Charges = 10,000,000 + 50,000 = $10,050,000

Depreciation Expense = (Cost of Asset $10,050,000 – Salvage Value 0) / Useful life 5

= $2,010,000

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