Marc Corporation Wants to Purchase a New Machine for $400,000

Essay

Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine can produce sales of $275,000 each year for next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS (modified accelerated cost recovery system) for depreciation. The machine is considered 3-year property and is not expected to have any significant residual at the end of its useful life. Marc's income tax rate, t, is 40%. Management estimates that the weighted-average cost of capital (WACC) is 10%. A partial MACRS depreciation table is reproduced below. $$\begin{array} { | l | l | l | } \hline \text { Year } & \text { 3-year property } & \text { 5-year property } \\\hline 1 & 33.33 & 20.00 \\\hline 2 & 44.45 & 32.00 \\\hline 3 & 14.81 & 19.20 \\\hline 4 & 7.41 & 11.52 \\\hline 5 & & 11.52 \\\hline 6 & & 5.76 \\\hline\end{array}$$ Required:
1. What is the estimated net present value (NPV) of the investment (rounded to the nearest whole dollar)? (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 all estimated cash flows occur at year-end.
2. What is the present value payback period (rounded to two decimal places)?