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

question 86

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.

Rounded to the nearest whole percentage (e.g., 31.349% = 31%) , what is the annual accounting (book) rate of return (ARR) based on the initial investment?

• A) 12%.
• B) 20%.
• C) 32%.
• D) 36%.
• E) 40%.

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Definitions:

Serial Position Effect

Our tendency to recall best the last and first items in a list.

Recall

The act of retrieving information or memories from the past without the aid of cues, differing from recognition which involves identifying information from provided options.

Mnemonic

A device or technique, often involving an association of terms, used to help remember information or facts.

Acronym Formation

The process of creating a new word from the initial letters of a phrase, intended for easier memorization or communication.