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

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 combined income tax rate is 40%. Management requires a minimum after-tax rate of return of 10% on all investments.

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.)

A) 2.5 years.
B) 2.7 years.
C) 3.1 years.
D) 3.6 years.
E) 4.2 years.