Question
Quip Corporation wants to purchase a new machine for $500,000. Management predicts that the machine will produce sales of $210,000 each year for the next
Quip Corporation wants to purchase a new machine for $500,000. Management predicts that the machine will produce sales of $210,000 each year for the next 6 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 $35,000 and no gain on sale of the equipment at the end of it's life. Quip's combined income tax rate, t, is 35%. Management requires a minimum after-tax rate of return of 9% 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 9%, 6 years, is 4.486 and for 5 years it is 3.89. The present value $1 factor for 9%, 6 years, is 0.596.) Assume that after-tax cash inflows occur at year-end.
$112,000. | ||
$21,600. | ||
$79,800. | ||
$48,800. |
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