Pique Corporation wants to purchase a new machine for $280,000. Management predi

Question

Pique Corporation wants to purchase a new machine for $280,000. Management predicts that the machine can produce sales of $200,000 each year for the next 4 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $77,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40.00%. Management requires a minimum after-tax rate of return of 10.00% on all investments. What is the present value payback period, rounded to one-tenth of a year? Use Excel PV in your calculations. 3.6 3.2 3.4 3.0 3.8 Pique Corporation wants to purchase a new machine for $280,000. Management predicts that the machine can produce sales of $200,000 each year for the next 4 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $77,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 40.00%. Management requires a minimum after-tax rate of return of 10.00% on all investments. What is the present value payback period, rounded to one-tenth of a year? Use Excel PV in your calculations. 3.6 3.2 3.4 3.0 3.8

Explanation / Answer

Depreciation=$280000/4=$70000

Payback Period=the last period with negative cash flow+The absolute value of cumulative cash flow at the end of period A/Total cash flow during tehe period A

Revenue Variable Cost Depreciation Profit before tax Tax @ 40% Profit after Tax Add Depreciation to PAT Cash Inflow Discount Rate 10% Discounted cash Flow$ Cumulative Cash Inflow $ 0 -280000 1 -280000 -280000 1 200000 77000 70000 53000 21200 31800 70000 101800 0.9091 92546.38 -187453.62 2 200000 77000 70000 53000 21200 31800 70000 101800 0.8264 84127.52 -103326.1 3 200000 77000 70000 53000 21200 31800 70000 101800 0.7513 76482.34 -26843.76 4 200000 77000 70000 53000 21200 31800 70000 101800 0.683 69529.4 42685.64 Total

Depreciation=$280000/4=$70000

Payback Period=the last period with negative cash flow+The absolute value of cumulative cash flow at the end of period A/Total cash flow during tehe period A

Payback Period=3+l-26843.76l/69529.4 3.386 3.4 Years Rounded off to one decimal

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