Marc Corporation Wants to Purchase a New Machine for $400,000

question 101

Essay

Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine can 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 as a 3-year property and is not expected to have any significant residual at the end of its useful years. Marc's income tax rate is 40%. Management requires a minimum of 10% return on all investments. A partial MACRS depreciation table is reproduced below. Required:
1. What is the estimated net present value of the investment (rounded to the nearest whole dollar)? (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 all estimated cash flows occur at year-end.
2. What is the present value payback period (rounded to two decimal points)?

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