Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce
Question:
Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will produce sales of $201,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $79,000 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 of 10% return on all investments. What is the approximate present value payback period, rounded to one-tenth of a year? (Note: PV $1 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.) Assume that annual after-tax cash inflows occur evenly throughout the year.
A 2.5 years
B 3.0 years
C 3.6 years
D 4.1 years
E 4.8 years