Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will 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 an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the expected net income (after tax) in Year 3 if the proposed investment is undertaken? Round answer to nearest whole dollar.
A) $28,000.
B) $36,000.
C) $42,000.
D) $70,000.
E) $72,000.

Question

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will 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 an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

What is the expected net income (after tax) in Year 3 if the proposed investment is undertaken? Round answer to nearest whole dollar.

What is the expected net income (after tax) in Year 3 if the proposed investment is undertaken? Round answer to nearest whole dollar.
A) $28,000.
B) $36,000.
C) $42,000.
D) $70,000.
E) $72,000.

Quizplus · Accepted Answer

To find the expected net income in Year 3, we need to calculate the machine's annual depreciation expense, which is ($300,000 - $50,000) / 5 = $50,000 per year. Then we calculate the earnings before interest and taxes (EBIT) as follows: 
Sales revenue: $200,000 
Expenses: $80,000 + $50,000 = $130,000 
EBIT: $70,000 
Next, we calculate the income tax expense as 40% of EBIT: 
Income tax expense: 0.4 x $70,000 = $28,000 
Finally, we subtract the income tax expense from EBIT to get the expected net income: 
Net income: $70,000 - $28,000 = $42,000 
Therefore, the best choice is C.

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