Question

Daily Enterprises is purchasing a $9.9 million machine. It will cost $45,000 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 $1.1 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.)

Answer 1

The annual incremental earnings is computed as shown below:

= (Incremental revenue - incremental costs - depreciation) x (1 - tax rate)

Depreciation is computed as follows:

= (cost of machine + cost of transport) / Number of years

= ($ 9,900,000 + $ 45,000) / 5

= $ 1,989,000

So, the amount will be computed as follows:

= ($ 3,900,000 - $ 1,100,000 - $ 1,989,000) x (1 - 0.35)

= $ 527,150

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