Hello Ozkan,
Question is asking only after Tax CF for the 2nd Year
Take Annual CF After Tax (150,000*0.40)=$90,000
Add-Dep Tax Shield =$500,000/4 Year=125,000*0.40=$50,000
So, the Correct answer will be $140,000 CF for 2nd Year
Hope it is clear !!!
Note: Please note that if the question is asking CF for end of Life of Project/Terminal CF than, we will take disposal proceed..
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Israr Ali Shaikh
[Senior Accountant]
Burjuman
United Arab Emirates
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Original Message:
Sent: 03-19-2023 02:28 AM
From: Ozkan Memisoglu
Subject: Part 2 SU13 Q
Hi everyone,
I am struggling to understand the amount of relevant cash flow in the following question.
A company installed new equipment with a four-year useful life and no salvage value. The new equipment cost $500,000 and will generate pretax cash savings of $150,000 annually. Old equipment with a book value of $50,000 and a remaining life of two years was sold for $20,000 when the new equipment was purchased. The company uses straight-line depreciation and its effective income tax rate is 40%. The second year's relevant after-tax cash flow is
Correct Answer: $140,000
Annual after-tax cash saving: $90,000
Tax shield on the depreciation of new equipment: $125,000*0,40=$50,000
Tax shield on the depreciation of old equipment (still has two years remaining life): $50,000/2*0,40=$10,000
So, I am finding the flow as $90,000+$50,000-$10,000=$130,000
Could you please assist me about what I overlook in this question?
Thank you in advance
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Ozkan Memisoglu
Director/Manager
Istanbul
Turkey
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