Question 1

What is the present value of $1 received four years from now (rounded to two decimal places) if the discount rate is 14%?

Multiple Choice

• $1.69.

• $0.59.

• $1.00.

• $1.62.

• $0.83.

Pique Corporation wants to purchase a new machine for $366,000. Management predicts that the machine can produce sales of $222,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $78,000 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 present value payback period, rounded to one-tenth of a year? (Note: PV factors for 10% are as follows: year 1 = 0.909; year 2 = 0.826; year 3 = 0.751; year 4 = 0.683; year 5 = 0.621; the PV annuity factor for 10%, 5 years = 3.791. Assume that annual after-tax cash inflows occur at year-end.)

Multiple Choice

• 2.5 years.

• 3.0 years.

• 3.3 years.

• 3.6 years.

• 4.0 years.