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%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the approximate internal rate of return (IRR) of the proposed investment? (Note: To answer this question, students must have access to Table 2 from Appendix C, Chapter 12.) Assume that all cash flows occur at year-end.
A) Less than 12%.
B) Somewhere between 12% and 14%.
C) Somewhere between 14% and 15%.
D) Somewhere between 15% and 20%.
E) Over 20%.

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%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the approximate internal rate of return (IRR) of the proposed investment? (Note: To answer this question, students must have access to Table 2 from Appendix C, Chapter 12.) Assume that all cash flows occur at year-end.
A) Less than 12%.
B) Somewhere between 12% and 14%.
C) Somewhere between 14% and 15%.
D) Somewhere between 15% and 20%.
E) Over 20%.

Quizplus · Accepted Answer

The Answer of 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%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the approximate internal rate of return (IRR) of the proposed investment? (Note: To answer this question, students must have access to Table 2 from Appendix C, Chapter 12.) Assume that all cash flows occur at year-end.
A) Less than 12%.
B) Somewhere between 12% and 14%.
C) Somewhere between 14% and 15%.
D) Somewhere between 15% and 20%.
E) Over 20%.

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