Railways 3
Railway Corporation wants to purchase a new machine for $360,000. Management predicts that the machine can produce sales of $220,000 yearly for the next five years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation), totaling $78,000 per year. The firm uses straight-line depreciation with no residual value for all depreciable assets. Railway's combined income tax rate is 40%. Management requires a minimum after-tax return of 10% on all investments.
What is the present value payback period, rounded to one-tenth of a year?
Note: PV 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 annual after-tax cash inflows occur at year-end.
What is the present value payback period, rounded to one-tenth of a year?
Note: PV 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 annual after-tax cash inflows occur at year-end.
Correct answer:
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