Pique Corporation Wants to Purchase a New Machine for $300,000

question 84

Multiple Choice

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 amount of net income (after taxes) in Year 2 of the investment? Round to the nearest whole number.

• A) $24,000.
• B) $36,000.
• C) $48,000.
• D) $60,000.
• E) $120,000.

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Definitions:

Earnings Per Share

A financial ratio that measures the amount of a company's profit allocated to each outstanding share of common stock.

Market Value

The financial value at which an asset could be bought or sold in the market.

Total Debt Ratio

A financial metric that divides the total liabilities of a company by its total assets.

Capital Structure

The mix of different forms of funds used by a company to finance its overall operations and growth, including debt, equity, and hybrid instruments.