CMA Study Group

Hi all,

I have the task from IMA support Package with following information:

"<..> New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000.  <..> In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that firm should use to compute the net present value?"

In the sample solution from IMA tax shield is added and calculated as follows:

Tax shield [($1,500,000 - $300,000) ÷ 3] x .4 = 160,000

But: we need the CF for the 5^th year/period, from the tax point of view after 3 years the equipment is fully depreciated, no further depreciations in 4^th and 5^th period.

As a result no tax shield possible for 4^th and 5^th periods?

2. question: why they deduct 300 k USD? The equipment could be sold for 300 k USD, but there is also retirements costs of 100 k USD à salvage value is just 200 k USD.

Please, help a confused German CMA – candidate  ��

Best regards

Natalia

Hi all,

I have the task from IMA support Package with following information:

"<..> New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000.  <..> In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that firm should use to compute the net present value?"

In the sample solution from IMA tax shield is added and calculated as follows:

Tax shield [($1,500,000 - $300,000) ÷ 3] x .4 = 160,000

But: we need the CF for the 5^th year/period, from the tax point of view after 3 years the equipment is fully depreciated, no further depreciations in 4^th and 5^th period.

As a result no tax shield possible for 4^th and 5^th periods?

2. question: why they deduct 300 k USD? The equipment could be sold for 300 k USD, but there is also retirements costs of 100 k USD à salvage value is just 200 k USD.

Please, help a confused German CMA – candidate  ��

Best regards

Natalia

Hi all,

I have the task from IMA support Package with following information:

"<..> New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000.  <..> In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that firm should use to compute the net present value?"

In the sample solution from IMA tax shield is added and calculated as follows:

Tax shield [($1,500,000 - $300,000) ÷ 3] x .4 = 160,000

But: we need the CF for the 5^th year/period, from the tax point of view after 3 years the equipment is fully depreciated, no further depreciations in 4^th and 5^th period.

As a result no tax shield possible for 4^th and 5^th periods?

2. question: why they deduct 300 k USD? The equipment could be sold for 300 k USD, but there is also retirements costs of 100 k USD à salvage value is just 200 k USD.

Please, help a confused German CMA – candidate  ��

Best regards

Natalia

Hi all,

I have the task from IMA support Package with following information:

"<..> New equipment will be purchased for $1,200,000 and cost $300,000 to install. The equipment will be depreciated on a straight-line basis over 5 years for financial reporting purposes and 3 years for tax purposes. At the end of the fifth year, it will cost $100,000 to remove the equipment, which can be sold for $300,000.  <..> In a capital budgeting analysis, what is the expected cash flow at time = 5 (fifth year of operations) that firm should use to compute the net present value?"

In the sample solution from IMA tax shield is added and calculated as follows:

Tax shield [($1,500,000 - $300,000) ÷ 3] x .4 = 160,000

But: we need the CF for the 5^th year/period, from the tax point of view after 3 years the equipment is fully depreciated, no further depreciations in 4^th and 5^th period.

As a result no tax shield possible for 4^th and 5^th periods?

2. question: why they deduct 300 k USD? The equipment could be sold for 300 k USD, but there is also retirements costs of 100 k USD à salvage value is just 200 k USD.

Please, help a confused German CMA – candidate  ��

Best regards

Natalia