Question
Hammer Corporation wants to purchase a new machine for $298,000. Management predicts that the machine will produce sales of $205,000 each year for the next
Hammer Corporation wants to purchase a new machine for $298,000. Management predicts that the machine will produce sales of $205,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $72,000 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 50%.
Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars)? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.
Multiple Choice
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$48,200.
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$79,200.
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$98,400.
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$111,400.
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$69,400.
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