Question

Daily Enterpises is purchasing a $10,000,000 machine. The machine wil be depreclated using straight-sne depreciation over its 10 year the and wil have no salvage value. The machine will generate revenues of $6,500,000 per year along with fixed conts of $3,000,000 peryyar: If Daily's marginal tax rate is 25\%, what will be the cash flow in each of years 1 to 10 (the cash flow we be the same each year)? Enter your answer rounded to the nearest whole number. Enter your answer below.

Answer 1

Daily Enterprises' annual cash flow from the purchased machine, after accounting for revenues, costs, depreciation, and taxes, will be $2,875,000 for each of the 10 years.

Step-by-step explanation:

When calculating the cash flow for Daily Enterprises from the purchase of the machine, we need to consider the annual revenues, costs, depreciation, and tax effects. The machine costs $10,000,000 and is depreciated over 10 years, leading to an annual depreciation expense of $1,000,000 (10,000,000 / 10).

The cash flow before taxes for each year would be calculated as follows:

• Annual revenues: $6,500,000
• Less: Fixed costs: $3,000,000
• Less: Depreciation expense: $1,000,000
• Pre-tax Income: $2,500,000

Considering a 25% tax rate, the tax amount would be 25% of $2,500,000, which equals $625,000.

Therefore, the after-tax income is $2,500,000 - $625,000 = $1,875,000.

Finally, we add back the depreciation (a non-cash expense) to find the annual cash flow. So the annual cash flow from the machine for each of the 10 years will be:

After-tax Income + Depreciation = $1,875,000 + $1,000,000 = $2,875,000.

This rounded to the nearest whole number is exactly $2,875,000.