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 combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

What is the amount of net income (after taxes) in Year 2 of the investment? Round to the nearest whole number.

Answer 1

Partciculars	Amount
Annual sales	$200000
less: Expenses	($80000)
less: Depreciaton	($60000)
Profit before tax	$60000
Tax @40%	$24000 ($60000*40%)
Profit after Tax (Net Income)	$36000

Net income after taxes for all years remain same i.e. $36000

hence net income for year 2 is $36000

working notes

Depreciation calculation

Cost of new machine	$300000
Life of machine	5 years
Residual value	nil
Depreciation per annum	$60000 (300000/5)