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 net after-tax cash inflow in Year 1 from the investment?
A) $72,000.
B) $96,000.
C) $108,000.
D) $112,000.
E) $120,000.

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 net after-tax cash inflow in Year 1 from the investment?

What is the net after-tax cash inflow in Year 1 from the investment?
A) $72,000.
B) $96,000.
C) $108,000.
D) $112,000.
E) $120,000.

Quizplus · Accepted Answer

To calculate the net after-tax cash inflow in Year 1, we first determine the cash inflow before taxes and then subtract the taxes. The calculation is as follows:1. Gross Revenue: $200,0002. Less Expenses (excluding depreciation): $80,0003. Depreciation Expense: $300,000 / 5 years = $60,0004. Operating Income before Taxes: $200,000 - $80,000 - $60,000 = $60,0005. Taxes (40% of $60,000): $60,000 * 40% = $24,0006. Net Income: $60,000 - $24,000 = $36,000However, to find the net after-tax cash inflow, we need to add back the non-cash expense (depreciation) to the net income:Net after-tax cash inflow = Net Income + Depreciation = $36,000 + $60,000 = $96,000

Pique Corporation Wants to Purchase a New Machine for $300,000