Marc Corporation Wants to Purchase a New Machine for $400,000

question 115

Multiple Choice

Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine will produce sales of $275,000 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 company uses MACRS for depreciation. The machine is considered as a 3-year property and is not expected to have any significant residual at the end of its useful years. Marc's combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments. A partial MACRS depreciation table is reproduced below. What is the after-tax cash inflow in Year 1 from the proposed investment (rounded to the nearest thousand) ?

• A)$62,000.
• B)$114,000.
• C)$170,000.
• D)$240,000.
• E)$37,000.

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Definitions:

Opportunity Cost

Represents the value of the best alternative that is forgone when a decision is made.

Unit(s)

The fundamental measurement or quantity of a good, service, or economic variable used as a standard or baseline for transactions, assessments, or calculations.

Toys

Objects designed for play or amusement, often targeted towards children.

Heckscher-Ohlin Model

A model in international trade theory that explains patterns of trade between countries based on their differences in factor endowments.