CMA Study Group

 View Only
  • 1.  Could anyone help

    Posted 05-18-2022 01:59 PM
    Quad Company is considering buying new equipment costing $450,000 to update its tailgating business. Management anticipates that the machine will produce cash sales of $237,000 each year over the next five years. Annual cash expenses are projected to be $85,000. Quad plans to depreciate the new equipment using the straight-line method over the same five year period. Quad will then sell the asset for $63,000 at the end of year 5. Do not deduct salvage value when calculating depreciation. Quad's combined income tax rate is 30%. Determine the net present value for the investment.


  • 2.  RE: Could anyone help

    Posted 05-19-2022 05:16 AM
    Am equally in , but i reside in Ajman





  • 3.  RE: Could anyone help

    Posted 05-20-2022 07:21 AM
    Hi Bhargav,
    Please find the answer below and please let me know if you find it correct and understandable :

    NPV = PV of Net cash inflows - PV of Net cash outflows = $532,928 - $450,000 = $82,928.

    (Please note that I've taken 10% as the required rate of return for all the PV calculation as it is missing in question)

    Now, Lets calculate PV of Net cash Inflows :
    First, We have Before- tax cash inflow per year of $237,000 - $85,000 = $152,000
    After-tax cash flow = 152,000*(1- .30) = $106,400
    Now adding Depreciation tax shield of $27,000   [which is calculated as $450,000/5 = 90,000 Dep. each year and Tax shield is $27000 (30% of 90,000) ]

    Therefore, After-Tax Annual cash inflow per year = $106,400 + $27,000 = $133,400

    Now, We need to know the
    After-tax value of selling the equipment that is $63,000 - Tax liability on gain = 63,000 - $18,900 (30% of $63,000) = $44,100.                 
    [Note: Tax is on whole 63,000 gain as we have applied whole dep. to asset and its book value is zero ]

    Therefore, Let's calculate NPV of these cash inflows :
    PV of Annual cash inflow for 5 years =$133,400 * 3.79 = $505,586
    PV of Disposal value of equipment at the end of 5th year = $44,100 * .62 = $27,342
    Total PV of Net cash inflow = $505,586 + $27,342 = $532,928

    Note: All these PV calculations would change if required rate of return is changed and so would be the NPV. I hope you understood the concept here, and please feel free to correct me if you find any mistake in my answer.

    Thanks​​
    Shubham Sharma

    ------------------------------
    Shubham Sharma
    Unemployed
    Gurugram
    India
    ------------------------------



  • 4.  RE: Could anyone help

    Posted 05-20-2022 09:16 AM
    Hi Bhargav,

    I wish I could help you but unfortunately the question is missing required ROI rate so it would be difficult to calculate.

    You can read Shubham Sharma, it is a very good one. You will understand how to do it just put the right numbers.

    Thanks,
    Ahmed Zolfakar

    ------
    Ahmed Zolfakar
    Accounting manager
    Egypt


    ------------------------------
    Ahmed Zolfakar
    Director/Manager
    Giza
    Egypt
    ------------------------------



  • 5.  RE: Could anyone help

    Posted 05-21-2022 02:26 AM
    Yes, I do agree that the question has been missing out on the hurdle or the required rate of return. I think we can consider payback reciprocal as the approx. estimate internal rate of return.

    ------------------------------
    Anil Dalmeida
    Director/Manager
    Salmiya, Kuwait
    Kuwait
    ------------------------------



  • 6.  RE: Could anyone help

    Posted 05-22-2022 02:07 PM
    Hi Everyone,

    does any of you bought extra materials to study for the CMA Exam? if yes,  what are those materials?

    Sincerely 
    Martha 





  • 7.  RE: Could anyone help

    Posted 05-23-2022 01:35 PM

    Hi Martha,

    I just bought the CMA prep material from Hock International. I would recommend to try their 14-day free trial first and if you like the way they teach, you can sign up for the course with 45% off.

    It's been a couple of weeks for me with the full course and I like it so far.

    There are other prep materials as well - like Gleim, Becker, CMA EXAM ACADEMY etc.

    Hope that helps.

    Best,
    Jessica Chawla

    Financial Analyst

    Atlanta, GA



    ------------------------------
    Jessica Chawla
    Analyst
    Atlanta GA
    United States
    ------------------------------



  • 8.  RE: Could anyone help

    Posted 05-24-2022 01:39 AM
    Hi, I use this approach when dealing with this kind of project cash flow.  Straight-line Depreciation (5 years) is 450k/5= 90k/year.
    Year 0 the company invests $450k on equipment, so the cash flow is -450k.
    From year 1 to year 4, tax each year is (237k - 85k - 90k) * 30% = 18.6k. Therefore, cash inflow (year 1-4)  is (237k - 85k - 18.6k)= 133.4k.
    For year 5, the tax is (237k + 63k - 85k - 90k) * 30% = 37.5k. Therefore, cash inflow (year 5) = 237k + 63k - 85k - 37.5k = 177.5k
                            Year 0      Year 1   Year 2      Year 3     Year 4       Year 5
    Cash flow         -450k    133.4k   133.4k     133.4k     133.4k      177.5k
    Assuming the rate of return is 10%. So use a financial calculator and input Rate  =10%, Year 0= -450k-, Year 1 to 4 = 133.4, year 5 = 177.5. We have NPV = 83,074.
    Please correct me if I am incorrect. Good luck to everyone.

    ------------------------------
    Duc Truong
    Accountant
    Westminster CA
    United States
    ------------------------------