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VIPSolutions · Accepted Answer

## Objective

Calculate the annual incremental earnings (net income) associated with the new machine for Daily Enterprises.

---

## Available Data

- **Cost of machine:** \$10,400,000
- **Transport & installation cost:** \$51,000
- **Useful life:** 8 years
- **Salvage value:** \$
- **Incremental revenue/year:** \$4,200,000
- **Incremental costs/year:** \$1,200,000
- **Marginal tax rate:** 20%

---

## Step 1: Calculate Total Depreciable Cost

$$
\text{Total depreciable cost} = \text{Cost of machine} + \text{Transport & installation cost}
$$
$$
= \$10,400,000 + \$51,000
$$
$$
= \$10,451,000
$$

---

## Step 2: Calculate Annual Depreciation (Straight-Line Method)

$$
\text{Annual Depreciation} = \frac{\text{Total depreciable cost} - \text{Salvage Value}}{\text{Useful life}}
$$
$$
= \frac{\$10,451,000 - \$}{8}
$$
$$
= \$1,306,375
$$

---

## Step 3: Calculate Annual Earnings Before Tax (EBT)

$$
\text{Earnings Before Tax (EBT)} = \text{Incremental Revenue} - \text{Incremental Costs} - \text{Annual Depreciation}
$$
$$
= \$4,200,000 - \$1,200,000 - \$1,306,375
$$
$$
= \$1,693,625
$$

---

## Step 4: Calculate Taxes

$$
\text{Taxes} = \text{EBT} \times \text{Tax Rate}
$$
$$
= \$1,693,625 \times .20
$$
$$
= \$338,725
$$

---

## Step 5: Calculate Annual Incremental Earnings (Net Income)

$$
\text{Net Income} = \text{EBT} - \text{Taxes}
$$
$$
= \$1,693,625 - \$338,725
$$
$$
= \$1,354,900
$$

---

## Final Answer

**The annual incremental earnings (net income) associated with the new machine are:**

$$
\boxed{\$1,354,900}
$$

(Rounded to the nearest dollar.)

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