Hammer Corporation wants to purchase a new machine for $240,000. Management predicts that the machine will produce sales of $220,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $90,000 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. Less than 22%. Somewhere between 22% and 24%. Somewhere between 24% and 25%. Somewhere between 25% and 30%. Over 30%.
1.
Hammer Corporation wants to purchase a new machine for $240,000. Management predicts that the machine will produce sales of $220,000 each year for the next 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding
Less than 22%.
Somewhere between 22% and 24%.
Somewhere between 24% and 25%.
Somewhere between 25% and 30%.
Over 30%.
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