3.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 net present value (NPV) of the investment? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.
| epriciation | |
| Cost of Machine | 300,000 |
| Life | 5 year |
| Depriciation =cost/ life |
60000 |
| Particular | Amount in $ |
| Sales | 200000 |
| Less: | |
| Other Expenses | 20000 |
| Less: | |
| Depriciation Expenses | 60000 |
| EBT | 120000 |
| Less: Tax @40% | 48000 |
| EAT | 72000 |
| Add: | |
| Depriciation Expenses | 132000 |
NPV is calculated as follow
| Year | Cash Flow | PF @10% | PV of Cash Flow |
| 0 | -300000 | 1 | -300000 |
| 1 | 132000 | 0.909090909 | 120000 |
| 2 | 132000 | 0.826446281 | 109090.9091 |
| 3 | 132000 | 0.751314801 | 99173.55372 |
| 4 | 132000 | 0.683013455 | 90157.77611 |
| 5 | 132000 | 0.620921323 | 81961.61464 |
| 200383.8536 |
NPV of the project is $ 200,383.85
