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Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...

  • 1.  Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...

    Posted 10-22-2011 05:11 AM

     Colvern Corporation is considering the acquisition of a new computer-aided machine tool
    to replace an existing, outdated model. Relevant information includes the following.
    Projected annual cash savings $28,400
    Annual depreciation - new machine 16,000
    Annual depreciation - old machine 1,600
    Income tax rate 40%
    Annual after-tax cash flows for the project would amount to
    a. $5,600.
    b. $7,440.
    c. $17,040.
    d. $22,800.

    D is correct.

    I think the calculation is 28400*60%+(16000-1600)*40%=22800.

    but I don't understand why the depreciation tax shield is (16000-1600)*40% but not 16000*40%?

    can someone give me explanation?



  • 2.  Re: Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...

    Posted 10-23-2011 12:07 PM

    hi, Jaber. why you say "we still have old depreciation"? is this mean the old depreciation exists after the disposal of the old machine?



  • 3.  RE: Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...

    Posted 15 days ago
    The annual cash flow from the investment is calculated as: 
    
    Annual cash flow = (projected cash savings - change in depreciation^ - tax rate) + (change in 
    depreciation 
    
    Change in depreciation = new depreciation expense - old depreciation expense 
    Change in depreciation = $16,000 - $1,600 = $14,400 
    
    Annual cash flow = ($28,400 - $14,400)(1 - 0.4) + ($14,400) 
    
    Annual cash flow = $14,000(0.6) + $14,400 = $8,400 + $14,400 = $22,800. 
    


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    Khalafalla Khalafalla
    Accountant
    Kuwait
    Kuwait
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  • 4.  RE: Colvern Corporation is considering the acquisition of a new computer-aided machine tool to replace...

    Posted 13 days ago
    Hello,

    In this type of question, we have to solve using the increment approach. The annual saving is the difference between the current year and the prior year. so for depreciation tax shield also we will take the difference between the two machineries.


    Thank .

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    Needa Maruf
    India.
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