Hammer Corporation wants to purchase a new machine for $385,000. Management predicts that the machine will produce sales
Posted: Sat Feb 19, 2022 2:34 pm
Hammer Corporation wants to purchase a new machine for $385,000.
Management predicts that the machine will produce sales of $290,000
each year for the next 5 years. Expenses are expected to include
direct materials, direct labor, and factory overhead (excluding
depreciation) totaling $89,000 per year. The firm uses
straight-line depreciation with an assumed residual (salvage) value
of $50,000. Hammer'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 approximate internal rate of return
(IRR) of the proposed investment? (Note: To answer this question,
students should use Table 2 from Appendix C, Chapter
12.) Assume that all cash flows occur at year-end.
Multiple Choice
Less than 22%.
Somewhere between 22% and 24%.
Somewhere between 24% and 25%.
Somewhere between 25% and 30%.
Over 30%.
Management predicts that the machine will produce sales of $290,000
each year for the next 5 years. Expenses are expected to include
direct materials, direct labor, and factory overhead (excluding
depreciation) totaling $89,000 per year. The firm uses
straight-line depreciation with an assumed residual (salvage) value
of $50,000. Hammer'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 approximate internal rate of return
(IRR) of the proposed investment? (Note: To answer this question,
students should use Table 2 from Appendix C, Chapter
12.) Assume that all cash flows occur at year-end.
Multiple Choice
Less than 22%.
Somewhere between 22% and 24%.
Somewhere between 24% and 25%.
Somewhere between 25% and 30%.
Over 30%.