CMA Study Group

Capital Budgeting

  • 1.  Capital Budgeting

    Posted 16 days ago
    Pachyderm Moving is reviewing data related to a new moving truck investment proposal. The new truck will cost $116,000 and have a five-year useful life. Management estimates that at the end of its useful life, the new truck will be sold for $20,000; however, when calculating depreciation the $20,000 is not subtracted from the cost. Therefore, at the end of the five-year life, the truck will have a basis of $0. Pachyderm expects that the annual net after-tax cash savings will be equal to $27,000. Assume an effective tax rate of 50%. Also assume that straight-line depreciation is being used and that Pachyderm's management has set a 9% hurdle rate on similar investments. What is the net present value of the new moving truck?
     Ans : (4480)

    As per explanation given,
    Cash outflow (1,16,000)
    Cash Inflow    27,000 * 3.8897 = 105022
                           (20,000 - 50 %)*.6499 = 6499
    Net Present Value = ($116,000) + $105,021 + $6,499 = ($4,480)

    cash savings of 27,000 and cash flow from sale has been taken in consideration. why depreciation tax saving hasn't been considered? Can someone please explain

    Kirti Sheth

  • 2.  RE: Capital Budgeting

    Posted 16 days ago
    The given information says after-tax cash savings will be equal to $27,000.  Since it is after-tax, depreciation tax savings are already included in the $27,000.

    Crystal Graham
    Harvest AL
    United States