Question
Quip Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce sales of $190,000 each year for the next
Quip Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce sales of $190,000 each year for the next 6 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 $41,000 and no gain on sale of the equipment at the end of it's life. Quip's combined income tax rate, t, is 21%.
Management requires a minimum after-tax rate of return of 8% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred)? (The PV annuity factor for 8%, 6 years, is 4.623 and for 5 years it is 3.993. The present value $1 factor for 8%, 6 years, is 0.630.) Assume that after-tax cash inflows occur at year-end.
$21,600.
$48,800.
$82,000.
$79,800.
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