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)? (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) $99,000.
c) $112,000.
d) $79,800

net present value NPV = $79800

so correct option is D) $79,800

Explanation:

solution

we knw that Net Present value = PV of cash inflow - PV of cash outflow    ............1

so here PV of cash outflow = $300000  

and Net sales = $200000

expenses = $80000

Depreciation =  

Depreciation =  $50000

so Net income before taxes  = Net sales - Depreciation - expenses

Net income before taxes =  $200000  - $80000 - $50000

Net income before taxes =  $70000

and Tax expenses @ 40% = $28000

so

Net income = Net income before taxes - Tax expenses

Net income = $70000  - $28000

Net income = $42000

and

Depreciation = $50000

Net cash inflow =  Net income + Depreciation

Net cash inflow =  $42000  + $50000

Net cash inflow = $92000

and

PVIFA @ 10% 5 years = $3.7908

so

PV of cash inflow = $348755

PV of salvage value = $50000 ×0.6209

PV of salvage value = $31045

and

so here  Total PV of total cash inflow = $379800

and

net present value  NPV =  Total PV of total cash inflow - PV of cash outflow

net present value NPV = $379800 - $300000

net present value NPV = $79800

so correct option is D) $79,800

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