Piper Corporation wants to purchase a new machine for $300,000. Management predicts that the machine can produce

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Question:

Piper 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. Answer the following questions (3 points each).

A. What is the net after-tax cash inflow in Year 1 from the investment?

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B. What is the amount of net income (after taxes) in Year 2 of the investment? Round to the nearest whole number.

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C. What is the payback period for the new machine (rounded to nearest one-tenth of a year)? (Assume that the cash inflows occur evenly throughout the year.)

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D. Rounded to the nearest whole percentage (e.g., 31.349% = 31%), what is the annual accounting (book) rate of return (ARR) based on the initial investment?

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E. What is the net present value (NPV) of the investment, rounded to the nearest whole dollar? (The PV annuity factor for 5 years, 10% is 3.791.) Assume that the cash inflows occur at year-end.

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F. What is the approximate internal rate of return (IRR) of the investment? (Note: Use Table 2 from Appendix C, Chapter 12.) Assume that annual after-tax cash flows occur at year-end.

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G. 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. Assume that annual after-tax cash inflows occur at year-end.)