# CMA Study Group

View Only

## 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 ?

------------------------------
Roopak Malik
Consultant
Sainik Vihar, Pitampura
India
------------------------------

• #### 5.  RE: Part 3 Q .... Help me plz....

Posted 10-26-2021 03:16 AM
Investments (Depreciation)
Land      \$500 (\$0)
Bldg.   \$2,000 (\$200 (\$2,000/10yr))
Equip. \$3,000 (\$600 (\$3,000/5yr))

At Yr5...
1) Before tax income from operation is \$900 (rev \$1,200 - exp \$300)
So after-tax, including the tax shield, will be (\$900 - \$800) x (1- tax 40%) + \$800 = \$860
2) cash flows from sales:
Land: sales \$800 - tax base \$500 = \$300 profits.
tax on profit = \$300 x 40% = \$120
after-tax cash flow = sales \$800 - tax \$120 = \$680
Bldg: sales \$500 - tax base \$1,000 = \$500 loss.
tax benefit on loss = \$500 x 40% = \$200
after-tax cash flow = sales \$500 + \$200 = \$700
Equip: sales \$250 - tax base \$0 = \$250 profit
tax on profit = \$250 x 40% = \$100
after-tax cash flow = sales \$250 - \$100 = \$150

3) Total net cashflow in Yr5; \$860 + \$680 + \$700 + \$150 =  \$2,390

(I know study materials use different calculation methods/orders, but for me the above is better as I can breakdown into activities to avoid any miscalculations)

------------------------------
Eisuke
------------------------------