Question

Pique Corporation wants to purchase a new machine for $294,000. Management predicts that the machine can...

Pique Corporation wants to purchase a new machine for $294,000. Management predicts that the machine can produce sales of $203,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $68,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 20%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the net present value (NPV) of the investment, rounded to the nearest whole dollar? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.

Multiple Choice

  • ($366,554).

  • $160,010.

  • $205,502.

  • $250,994.

  • None of these.

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Homework Answers

Answer #1
Sales 203000
Less:Expenses 68000
Less: Annual Depreciation 58800 =294000/5
Income before tax 76200
Less: Income tax expense 15240 =76200*20%
Annual net income 60960
Annual net income 60960
Add: Annual Depreciation 58800
Annual net cash inflows 119760
Annual net cash inflows 119760
X PV annuity factor for 5 years 3.791
Present value of Annual net cash inflows 454010
Less: Investment cost 294000
Net present value (NPV) 160010
Option B $160,010 is correct
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