# CMA Study Group

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• #### 1.  Part 2 SU13 Q

Posted 03-19-2023 02:28 AM

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

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?

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Ozkan Memisoglu
Director/Manager
Istanbul
Turkey
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• #### 2.  RE: Part 2 SU13 Q

Posted 03-20-2023 01:45 AM

Hello Ozkan,

Question is asking only after Tax CF for the 2nd Year

Take Annual CF After Tax (150,000*0.40)=\$90,000

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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• #### 3.  RE: Part 2 SU13 Q

Posted 03-20-2023 04:27 AM

the loss on sale of old equipment is only part of the 1st year initial cash flow or year zero cash flow. it has no impact on 2nd year cash flows.. the loss on sale of old eq will be immediately recognized in full at year zero.

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Sumit Mishra
Director/Manager
New Delhi
India
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• #### 4.  RE: Part 2 SU13 Q

Posted 03-20-2023 05:23 AM
150000 pretax cash flow before dep.
-125000 depreciation- 500k/4 years
25000- pretax cashflow
10000- 40%tax
15000- after tax