Question

A company has new equipment costs of $2 million, which will be depreciated to zero using...

A company has new equipment costs of $2 million, which will be depreciated to zero using straight-line depreciation over 7 years. The company expects to bring in revenues of $6 million per year for 7 years with production costs of $1.6 million per year. If the company's tax rate is 44%, what are the incremental earnings (not cash flows) of this project in years 1-7? Enter your answer in dollars and round to the nearest dollar.

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Answer #1

Cost of new equipments = $ 2,000,000

Depreciated to zero with depreciable life using straight-line depreciation = 7 years

Deprecaition amount per year = Cost of new equipments/Depreciable life

= $2,000,000/7

= $ 285,714

Calculating the incremental earnings of this project in year 1-7:

Partcular Amount in $
Incremental Revenue 6,000,000
Incremental Production Cost (1,600,000)
Deprecaitopn of new Equipment (285,714)
Incremental Income before Tax 4114,286
Less: Tax @44% (1810,286)
Incremental Earnings 2,304,000

So, the incremental earnings of this project in year 1-7 is $ 2304,000

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