# CMA Study Group

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## 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

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Kirti Sheth
None
SINGAPORE
Singapore
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• #### 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.

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Crystal Graham
Director/Manager
Harvest AL
United States
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