Question

Daily Enterprises is purchasing a

$ 10.4$10.4

million machine. It will cost

$ 53 comma 000$53,000

to transport and install the machine. The machine has a depreciable life of five years and will have no salvage value. Assume that CCA deductions are the same as depreciation expenses. The machine will generate incremental revenues of

$ 3.8$3.8

million per year along with incremental costs of

$ 1.5$1.5

million per year. If​ Daily's marginal tax rate is

35 %35%​,

what are the incremental earnings associated with the new​ machine?

The annual incremental earnings are?

​(Round to the nearest​ dollar.)

Answer 1

Solution

Daily Enterprise

Determination of the incremental earnings associated with the new machine:

Cash outflow in year 0

Cost of machine          $10,400,000

Transport and installation cost $53,000

Cash outflow = $10,453,000

Incremental free cash flows years 1- 5:

= (revenues – costs) x (1- tax rate) + (depreciation x tax rate)

Depreciation = 10,453,000/5 = $2,090,600

= (3,800,000 – 1,500,000) x (1 – 0.35) + (2,090,600 x 0.35)

= $1,495,000 + $731,710 = $2,226,710

Annual incremental earnings = $2,226,710