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

question 53

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%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars) ? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.

• A) $48,800.
• B) $79,800.
• C) $99,000.
• D) $112,000.
• E) $70,000.

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Definitions:

Inferential Statistics

A branch of statistics that allows one to make predictions or inferences about a population based on a sample of data taken from that population and analyzed through the use of statistical tests.

Generalizability

The extent to which findings from a study can be applied or extended to broader contexts outside the specific study conditions.

Research Study

A systematic investigation into and study of materials and sources in order to establish facts and reach new conclusions.

Population

The whole number of inhabitants or residents in a particular area or region, often studied in terms of size, density, and distribution.