CMA Study Group

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  • 1.  Please help!

    Posted 09-18-2017 10:41 PM
    A company installed new equipment with a four year useful life and no salvage value. The new equipment cost $ 600 000 and will generate pretax cash savings of $150 000 annually. Old equipment with a book value of $ 50.000 and a remaining life of two years was sold for $ 20 000 when the new equipment was purchased. The company uses straight-line depreciation and its effective income tax rate is 40%. The second year's relevant after tax cash flow is
    a. $150 000
    b. $140 000
    c. $ 110 000
    d. $ 90 000
    Can anyone explain me why the answer is b?
    My calculation is go for a
    Thanks in advance!

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    MINH DAO THI
    Ho Chi Minh City
    Viet Nam
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  • 2.  RE: Please help!

    Posted 09-20-2017 01:58 AM
    Three components needs to be considered 
    cash inflow from operation, depreciation of new asset and depreciation of old asset

    Calculation

    1. After tax cash inflow from new equipment 150000×60%=90000
    2. Depreciation shield = depreciation of new asset - depreciation of old asset multiplied by tax rate is equal to 50000
    the answer is 140000



    Original Message


  • 3.  RE: Please help!

    Posted 09-21-2017 01:15 AM
    Thank you so much!

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    MINH DAO THI
    Ho Chi Minh City
    Viet Nam
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    Original Message