CMA Study Group

Original Message:
Sent: 5/18/2022 1:59:00 PM
From: Bhargav Desai
Subject: Could anyone help

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.

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
------------------------------

Original Message:
Sent: 05-18-2022 01:58 PM
From: Bhargav Desai
Subject: Could anyone help

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.

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
------------------------------

Original Message:
Sent: 05-20-2022 07:20 AM
From: Shubham Sharma
Subject: Could anyone help

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

Original Message:
Sent: 05-18-2022 01:58 PM
From: Bhargav Desai
Subject: Could anyone help

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.

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
------------------------------

Original Message:
Sent: 05-20-2022 09:15 AM
From: Ahmed Zolfakar
Subject: Could anyone help

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

Original Message:
Sent: 05-20-2022 07:20 AM
From: Shubham Sharma
Subject: Could anyone help

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

Original Message:
Sent: 05-18-2022 01:58 PM
From: Bhargav Desai
Subject: Could anyone help

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.

Original Message:
Sent: 5/18/2022 1:59:00 PM
From: Bhargav Desai
Subject: Could anyone help

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.

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
------------------------------

Original Message:
Sent: 05-22-2022 05:19 PM
From: Martha Zubia
Subject: Could anyone help

Hi Everyone,

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

Sincerely 

Martha 

Original Message:
Sent: 5/18/2022 1:59:00 PM
From: Bhargav Desai
Subject: Could anyone help

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.

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
------------------------------

Original Message:
Sent: 05-18-2022 01:58 PM
From: Bhargav Desai
Subject: Could anyone help

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.