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 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.
A) ($270,480).
B) $63,936.
C) $109,428.
D) $154,920.
E) None of these.

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 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.

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.
A) ($270,480).
B) $63,936.
C) $109,428.
D) $154,920.
E) None of these.

Quizplus · Accepted Answer

The NPV is calculated as follows:NPV = -Initial Investment + Present Value of Future Cash FlowsInitial Investment = $300,000Present Value of Future Cash Flows = $200,000 x 3.791 x (1 - 0.40) - $80,000 x 3.791 x (1 - 0.40)= $120,000 x 3.791 - $32,000 x 3.791= $454,920 - $121,000= $333,920Therefore, the NPV is $333,920, which is rounded to $334,000.

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