CMA Study Group

Part 3 Q .... Help me plz....

  • 1.  Part 3 Q .... Help me plz....

    Posted 12-11-2010 11:16 PM

    194) Olson Industries needs to add a small plant to accommodate a special contract to supply building materials over a five year period.  The required initial cash outlays at Time 0 are as follows.

    Land                   $500,000

    New building        2,000,000

    Equipment            3,000,000

    Olson uses straight-line depreciation for tax purposes and will depreciate the building over 10 years and the equipment over 5 years.  Olson’s effective tax rate is 40%.

    Revenues from the special contract are estimated at $1.2 million annually and cash expenses are estimated at $300,000 annually.  At the end of the fifth year, the assumed sales values of the land and building are $800,000 and $500,000, respectively.  It is further assumed the equipment will be removed at a cost of $50,000 and sold for $300,000.

    As Olson utilizes the net present value (NPV) method to analyze investments, the net cash flow for period 5 would be`

    a. $1,710,000.

    b. $2,070,000.

    c. $2,230,000.

    d. $2,390,000.



  • 2.  Re: Part 3 Q .... Help me plz....

    Posted 12-13-2010 06:41 PM

    Dear Salah

    can you please explain first point more?



  • 3.  Re: Part 3 Q .... Help me plz....

    Posted 12-13-2010 07:29 PM

    Dear Salah

    Thank you so much for your help. My mistake was in sale calculation for land and equipment. you cleared it for me. I really appreciate the help. 

    Dear Malek

    Explanation for first point 

    Operating after tax cash flow = 1.2million-300,000= 900,000 ; 900,000 * (1-.4)= 540,000

    Depreciation : Building    = 2million/10= 200,000

                           Equipment=3millon/5   = 600,000

    Depre Tax shield = 200,000+600,000 = 800,000 *.4 = 320,000

    Operating net cash inflow = 540,000+320,000 = 860,000



  • 4.  RE: Part 3 Q .... Help me plz....

    Posted 09-17-2021 11:56 AM
    Hey have you got the calc of above ques ?

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    Roopak Malik
    Consultant
    Sainik Vihar, Pitampura
    India
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