CMA Study Group

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

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

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