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

question 15

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 present value payback period, rounded to one-tenth of a year? (Note: PV 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 annual after-tax cash inflows occur at year-end.)

• A) 2.5 years.
• B) 3.0 years.
• C) 3.3 years.
• D) 3.6 years.
• E) 4.0 years.

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Definitions:

Article 2A

A specific portion of the Uniform Commercial Code that governs leases of personal property.

Buyer's Remedies

Legal actions available to a buyer when a seller fails to fulfill their contractual obligations, including recovery of damages and cancellation of the contract.

Tender

An offer to perform an obligation or to pay an amount to fulfill a contract, or the actual payment or delivery in compliance with such an offer.

Breach

The act of breaking a law, agreement, or code of conduct.