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.
A) $24,000.
B) $36,000.
C) $48,000.
D) $60,000.
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 amount of net income (after taxes) in Year 2 of the investment? Round to the nearest whole number.

What is the amount of net income (after taxes) in Year 2 of the investment? Round to the nearest whole number.
A) $24,000.
B) $36,000.
C) $48,000.
D) $60,000.
E) $120,000.

Quizplus · Accepted Answer

First, we need to calculate the annual operating income:

Sales revenue: $200,000 
Expenses: $80,000 
   EBIT: $120,000

Next, we can calculate the annual tax:

EBIT: $120,000 
Depreciation: ($300,000 / 5 years) = $60,000 
   Taxable income: $60,000 
Income tax (40%): $24,000 
   Net income after taxes: $96,000

To find the net income in year 2, we need to take the EBIT and subtract out the depreciation expense and the interest expense (which is assumed to be zero in this problem):

EBIT: $120,000 
Depreciation: $60,000 
   EBT: $60,000 
Income tax (40%): $24,000 
   Net income after taxes: $36,000

Therefore, the answer is B.

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