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

question 69

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 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.

• A) Less than 12%.
• B) Somewhere between 12% and 14%.
• C) Somewhere between 15% and 20%.
• D) Somewhere between 20% and 25%.
• E) Over 25%.

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