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

Multiple Choice

Quip Corporation wants to purchase a new machine for $300,000. Management predicts that the machine will 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 an assumed residual (salvage) value of $50,000. Quip's combined income tax rate, t, is 40%.

Management requires a minimum after-tax rate of return of 10% on all investments. What is the estimated net present value (NPV) of the proposed investment (rounded to the nearest hundred dollars) ? (The PV annuity factor for 10%, 5 years, is 3.791 and for 4 years it is 3.17. The present value $1 factor for 10%, 5 years, is 0.621.) Assume that after-tax cash inflows occur at year-end.

A) $48,800.
B) $79,800.
C) $99,000.
D) $112,000.
E) $70,000.