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

question 105

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 tax rate is 40%.Management requires a minimum 10% rate of return 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. )

• 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:

Personal Savings

The portion of an individual’s income that is not spent on consumption and is set aside for future use, typically in a savings account or investment.

Marginal Cost

The increase in cost that arises from producing one additional unit of a product or service.

R&D Financing

The process of funding research and development activities, typically involving significant investment in innovation and technology to spur growth and competitive advantage.

R&D Activities

Research and Development activities aimed at innovating and improving products or processes.