# CMA Study Group

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• #### 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

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Shubham Sharma
Unemployed
Gurugram
India
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• #### 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

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Ahmed Zolfakar
Accounting manager
Egypt

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Ahmed Zolfakar
Director/Manager
Giza
Egypt
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• #### 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.

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Anil Dalmeida
Director/Manager
Salmiya, Kuwait
Kuwait
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• #### 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

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Jessica Chawla
Analyst
Atlanta GA
United States
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• #### 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.

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Duc Truong
Accountant
Westminster CA
United States
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