Question

The Terme Corporation is contemplating the purchase of new equipment, which may potentially increase revenues by 30%. Currently, sales are $830,000 per year and cost of sales are 65% of sales. The equipment is expected to last for 4 years with no residual value. The cash outflow expected at the beginning of the year is $289,200. Ignoring income taxes, what is the estimated annual net operating income increase/decrease

Answer 1

Annual net operating income= $14,850

Step-by-step explanation:

The annual net operating income is the incremental sales less costs of good sold and annual depreciation.

Annual depreciation = (Cost of equipment - Salvage value)Number of years

= (289,200-0)/4 = 72,300

Increase in sales= $249,000

Annual net operating income = 249,000- (65%×249,000)-72,300=301,200

Annual net operating income= $14,850