Question

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $200,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the approximate present Value payback period, rounded to one-tenth of a year? (Note: PV $1 factors for 10% are as follows: year 1=0.909; year 2= 0.826; year 3 = 0.751; year 4 = 0.683; year 5 = 0.621; the PV annuity for 10%, 5 years = 3.791) Assume that annual after-Tax Cash inflows occur evenly throughout the year.

A) 4.8 years

B) 3.6 years

C) 2.5 years

D) 4.1 years

E) 3.0 years

Answer 1

eas. Exblanation 3,0o,000 50,000 = $50,000 EBT $ 0,000 . Taxes (uo%) $ 28,000 =-$92,000 investment ct/Ann ニキ3,00,000 / $ 92,000 3.26 easy 3.3 yeass sonded