CMA Study Group

Capital budgeting

  • 1.  Capital budgeting

    Posted 02-12-2020 09:13 AM
    Skyline Industries is analyzing a capital investment project. The new equipment is required by the project and will cost $350,000 with $25,000 installation and transportation costs. A five-year MACRS depreciation schedule (20%, 32%, 19.2%, 11.52%, 11.52%, 5.76%) with the half-year convention will be employed. Existing equipment, with a book value of $200,000 and an estimated market value of $100,000, will be sold immediately after installation of the new equipment. Annual incremental pre-tax cash inflows are estimated at $175,000. Skyline's effective income tax rate is 40%. After-tax operating cash flow for the first year of the project would amount to

    a. $105,000.
    b. $133,000.
    c. $135,000.
    d. $175,000.

    Can anyone tell me how to calculate the depreciation tax shield in this one? Ans is C

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    Riya Samuel
    Student
    MUMBAI
    India
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  • 2.  RE: Capital budgeting

    Posted 02-13-2020 02:22 AM
    Calculate the depreciation tax shield as depreciation amount (1- tax rate), $375,000* 20% (1 - 40%)=$30,000

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    Deon Denton
    Accountant
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  • 3.  RE: Capital budgeting

    Posted 02-21-2020 03:00 PM
    Tax shield =Depreciation  x tax rate





  • 4.  RE: Capital budgeting

    Posted 02-13-2020 02:24 AM
    175000*(1-40/100)+((350000+25000)*20/100)*40/100=135000


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    MAHESH CHANDA
    Student
    ANANTAPURAM
    India
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