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

question 108

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 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 (modified accelerated cost recovery system) for depreciation. The machine is considered 3-year property and is not expected to have any significant residual at the end of its useful life. Marc's income tax rate, t, is 40%. Management estimates that the weighted-average cost of capital (WACC) is 10%. A partial MACRS depreciation table is reproduced below. $$\begin{array} { | l | l | l | } \hline \text { Year } & \text { 3-year property } & \text { 5-year property } \\\hline 1 & 33.33 & 20.00 \\\hline 2 & 44.45 & 32.00 \\\hline 3 & 14.81 & 19.20 \\\hline 4 & 7.41 & 11.52 \\\hline 5 & & 11.52 \\\hline 6 & & 5.76 \\\hline\end{array}$$ Required:
1. What is the estimated net present value (NPV) 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 places)?

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Definitions:

Uncertainty Avoidance

A cultural dimension that describes the degree to which people in a society are comfortable with uncertainty and ambiguity.

Feminine Culture

A societal characteristic where qualities traditionally associated with women, such as cooperation, empathy, and caring, are highly valued.

Power Distance

Power distance is a cultural dimension that describes the extent to which individuals in a society accept and expect that power is distributed unequally.

Workforce Reductions

The process of decreasing the number of employees through methods such as layoffs or retirements, often for economic or business restructuring reasons.