CMA Study Group

Capital Budgeting Question

  • 1.  Capital Budgeting Question

    Posted 17 days ago
    Okay I keep seeing conflicting opinions on this question, and even Wiley and Gleim's questions conflict with eachother sometimes.

    When calculating the depreciation tax shield using straight line, is depreciation calculalted using salvage or ingoring it?

    Sometimes in question, salvage value is ignored and its the (Investment / Useful life). Other times, depreciation is calculated how it's normally learned (Investment - Salvage) / (Useful life).

    Please help!!!

    Bradley Kilbreth
    Manchester NH
    United States

  • 2.  RE: Capital Budgeting Question

    Posted 17 days ago
    Hello Bradley,

    Hope you are safe & doing well in CMA Part-2

    I have done a wide research since you have asked this question on 17 April. Honestly speaking, I didn't find a straight convincing argument.
    The difference between the two main approaches comes from variety of reasons: Tax requirements, estimation of salvage value, uncertainty of asset's future life, cash & accrual accounting basis ..etc. Even CPA & CFA articles & MCQs still not clear about it.

    Personally, I think it makes more sense to solve the question according to the following approaches:
    1. When "Salve value" amount is mentioned without any further details (Just salvage figure) >>> Subtract it when calculating annual depreciation & tax shield. 
    2. When the investment is estimated to be sold by a specific amount at the end of useful life >>> Ignore the selling (Salvage) value when calculating depreciation 
    Unfortunately, I can't provide a clear argument to proof these two approaches, just that option (1) has more uncertainty about the estimated salvage value and keep silent about depreciation tax reporting. Most cases have either a Zero salvage value or precised note that investment will be sold "at" exact amount, which provide some assurance of expected future cash inflow. Other cases have clearly mentioned the tax depreciation purpose / method to make it more easy (Ignore salvage value).

    For more details, please review & compare the following MCQs in exam support package:
    5. CSO: 2E1b LOS: 2E1b  -  14. CSO: 2E1b LOS: 2E1b  -  16. CSO: 2E1b LOS: 2E1b  -  17. CSO: 2E1b LOS: 2E1b

    Hope it will make sense to you, otherwise, we should cooperate to argue this issue with Dr. Monte or raise it directly to IMA student's support service.

    Kind regards

    Samer Ahmad, FMVA, SCA