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A
A. You are upgrading production equipment that will let you make more of your product in the same time.You forecast that total sales will increase by 18% next year, over the present amount of 107,000 units. If your sales price is $18 per unit, what are the incremental revenues next year from the upgrade?
B. Your business is purchasing a $10.3 million machine. It will cost $52,000 to transport and install the machine. The machine has a depreciable life of 5 years and will have no salvage value. The machine will generate incremental revenues of $4.1 million per year along with incremental costs of $1.4 million per year. If your business' marginal tax rate is 35%, what are the incremental earnings (net income) associated with the new machine?
C. You have a depreciation expense of $ 456,000 and a tax rate of 38%. What is your tax shield?
Expert Solution
A). Computation of the incremental revenue next year:-
Sales price next year = Current sales price * (1 + Growth rate)
= $18 * (1 + 18%)
= $21.24
Incremental revenue next year = (Next year sales price - Current sales price) * Number of units
= ($21.24 - $18) * 107,000
= $3.24 * 107,000
= $346,680
B). Computation of the incremental earnings:-
Total cost of machine = Cost of purchase + Cost of transport and installation
= $10,300,000 + $52,000
= $10,352,000
Depreciation = (Cost - Salvage value) / Estimated useful life
= ($10,352,000 - $0) / 5
= $2,070,400
Incremental earnings = (Incremental revenues - Incremental costs - Depreciation) * (1 - Tax rate)
= ($4,100,000 - $1,400,000 - $2,070,400) * (1 - 35%)
= $629,600 * 65%
= $409,240
C). Computation of the depreciation tax shield:-
Depreciation tax shield = Depreciation * Tax rate
= $456,000 * 38%
= $173,280
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