62. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 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 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 approximate internal rate of return (IRR) of the investment? (NOTE: To answer this
question, students must have access to Table 2 from Appendix C, Chapter 12.) Assume that
annual after-tax cash flows occur at year-end.
63. Pique Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine can produce sales of $200,000 each year for the next 5 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 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 cash flows occur at year–
end.)
64. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
What is the net after-tax cash inflow in Year 1 from the proposed investment?
65. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
What is the net income (after tax) in Year 3 if the proposed investment is undertaken?
66. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
What is the payback period for the new machine (rounded to the nearest one–tenth of a year)?
Assume that the cash inflows occur evenly throughout the year.
67. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
What is the annual accounting (book) rate of return (ARR) for the proposed investment, based on
the initial investment? (Round answer to nearest whole number/percentage.)
68. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
What is the estimated accounting (book) rate of return (ARR) for the proposed investment, based
on average investment? (Round answer to nearest whole number/percentage.)
69. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’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
estimated net present value (NPV) of the proposed investment (rounded to the nearest
hundred)? (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.
70. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’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 must have access to Table 2 from Appendix C, Chapter 12.) Assume that all
cash flows occur at year-end.
71. Quip Corporation wants to purchase a new machine for $300,000. Management predicts
that the machine will produce sales of $200,000 each year for the next 5 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 $50,000. Quip’s combined income tax rate,
t
, is 40%.
Management requires a minimum of 10% return on all investments. What is the approximate
present value payback period, rounded to one-tenth of a year? (Note: PV $1 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 evenly
throughout the year.
72. Marc Corporation wants to purchase a new machine for $400,000. Management predicts
that the machine will produce sales of $275,000 each year for the next 5 years. Expenses are
expected to include direct materials, direct labor, and factory overhead (excluding depreciation)
totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered
to be a 3-year property and is not expected to have any significant residual at the end of its
useful life. Marc’s combined income tax rate is 40%. Management requires a minimum after-tax
rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below.
Year 3-year property 5-year property
1 33.33 20.00
2 44.45 32.00
3 14.81 19.20
4 7.41 11.52
5 11.52
6 5.76
What is the after-tax cash inflow in Year 1 from the proposed investment (rounded to the
nearest thousand)?
73. If the net present value (NPV) of an investment proposal is positive, it would indicate that
the:
74. When evaluating capital budgeting decision models, the payback period emphasizes:
75. Which of the following would not be considered a benefit of conducting post–
implementation audits of capital investment projects?
76. Income tax effects are associated with all of the following except:
77. XYZ Corporation is contemplating the replacement of an existing asset used in the
operation of its business. The original cost of this asset was $28,000; since date of acquisition,
the company has taken a total of $20,000 of depreciation expense on this asset. The current
disposal (market) value of this asset is estimated as $18,000. XYZ is subject to a combined
income tax rate of 34%. What is the projected after-tax cash flow associated with the sale of the
existing asset?
78. Carmino Company is considering an investment in equipment that is expected to
generate an after-tax income of $6,000 for each year of its four-year life. The asset has no
salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at
the beginning of each year will be as follows:
Year 1 $30,000
Year 2 15,000
Year 3 7,500
Year 4 3,750
Calculate this asset’s accounting (book) rate of return (ARR) on average investment (which is
defined as a simple average of the average book value of the asset for each year of its four-year
life). Round the final answer to the nearest whole %.
79. Carmino Company is considering an investment in equipment that is expected to
generate an after–tax income of $6,000 for each year of its four-year life. The asset has no
salvage value. The firm is in the 40% tax bracket. The net book value (NBV) of the investment at
the beginning of each year will be as follows:
Year 1 $30,000
Year 2 15,000
Year 3 7,500
Year 4 3,750
The projected after-tax cash inflow generated by the asset in Year 3 is: