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

question 78

Multiple Choice

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will 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 an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

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

• A) 2.7 years.
• B) 3.0 years.
• C) 3.3 years.
• D) 3.6 years.
• E) 4.2 years.

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Definitions:

Carrying Costs

The total expenses associated with holding or maintaining an asset over time, including storage, insurance, and taxes.

Holding Cash

Maintaining a portion of one's assets in liquid cash form to meet immediate needs or prepare for future expenses or investment opportunities.

Total Costs

The complete amount of expenses incurred by a business or project, including both fixed and variable costs.

Money Market Instruments

Short-term financial instruments typically with high liquidity and very low risk.