CMA Study Group

  • 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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  • 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)

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    Eisuke
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