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

question 11

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 payback period for the new machine (rounded to nearest one-tenth of a year) ? (Assume that the cash inflows occur evenly throughout the year.)

• A) 2.5 years.
• B) 2.7 years.
• C) 3.1 years.
• D) 3.6 years.
• E) 4.2 years.

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Definitions:

Scores

Quantitative values or measurements used to evaluate or assess someone or something's performance or status.

Negatively Skewed

A distribution of data where most values cluster at the high end with a tail extending to the low end, indicating that the median is greater than the mean.

Positively Skewed

A distribution of data where more values fall on the left-hand side of the distribution, making the tail on the right longer or fatter.

Correlation Coefficient

A statistical measure that indicates the extent to which two variables fluctuate together, reflecting the strength and direction of their relationship.