Hammer Corporation wants to purchase a new machine for $280,000. Management predicts that the machine will produce sales of $180,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $81,000 per year. The firm uses straight-line depreciation with an assumed residual (salvage) value of $50,000. Hammer'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 should use Table 2 from Appendix C, Chapter 12.) Assume that all cash flows occur at year-end.

Multiple Choice

• Less than 7%.

• Somewhere between 7% and 9%.

• Somewhere between 9% and 10%.

• Somewhere between 10% and 15%.

• Over 15%.