Question

Pique Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can 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 no residual value for all depreciable assets. Pique's tax rate is 40%. Management requires a minimum rate of return of 10% on all investments.

What is the annual after tax cash flow (AATCF)for Year 1 from the investment?

Group of answer choices

$120,000

$112,000

$108,000

$72,000

$96,000

Answer 1

Invested capital = $300,000

Useful life = 5 years

Annual depreciation expense = Invested capital/ Useful life

= 300,000/5

= $60,000

Expense excluding depreciation = $80,000

Income Statement
Sales	200,000
Expense excluding depreciation	-80,000
Depreciation expense	-60,000
Profit before tax	60,000
Tax expense	-24,000
Net income	36,000
Add: Depreciation	60,000
Annual after tax cash flow	$96,000

The annual after tax cash flow (AATCF)for Year 1 from the investment = $96,000

Fifth option is correct.