Pique Corporation wants to purchase a new machine for $260,000. Management predi
ID: 2536222 • Letter: P
Question
Pique Corporation wants to purchase a new machine for $260,000. Management predicts that the machine can produce sales of $170,000 each year for the next 4 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $69,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Pique's combined income tax rate is 30.00%. Management requires a minimum after-tax rate of return of 10.00% on all investments. What is the approximate internal rate of return (IRR) of the investment? Use Excel IRR function Somewhere between 16.53% and 21.53% Less than 8.53% Somewhere between 11.53% and 16.53% Over 21.53% somewhere between 8.53% and 10.53%Explanation / Answer
Calculation of Annual Cash Flows: Sales 170000 Depreciation PA* Less: Costs 69000 Cost 260000 Less: Depreciation 65000 Life 4.00 Income Before Tax 36000 Depreciation PA 65000 Less: Tax @ 30% 10800 Income After Tax 25200 Add: Depreciation 65000 Cash Flows After Taxes 90200 Calculation of IRR for the Investment: Present Value Present Value Year Cash Flows Discount Factor @ 15% At 15% Discount Factor @ 14% At 14% 0 -260000 1.00 -260000 1.00 -260000 1 90200 0.87 78435 0.88 79123 2 90200 0.76 68204 0.77 69406 3 90200 0.66 59308 0.67 60882 4 90200 0.57 51572 0.59 53406 -2481 2817 IRR=14%+(2817/(2817+2481))*1% IRR= 14.53% Answer is Somewhere between 11.53% and 16.53%