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MANAGEMENT ADVISORY SERVICES CASH FLOW COMPUTATIONS Cash Flow from Sale of Old Machine Sold at a Loss 43. Hoff is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its useful life. Straight-line depreciation of $25,000 annually is available. The machine has a current market value of $50,000. What is the cash flow from selling the machine if the tax rate is 40%? a. $25,000 c. $62,000 b. $50,000 d. $80,000 D, L & H 9e 43. Hoff is considering the sale of a machine with a book value of $160,000 and 3 years remaining in its useful life. Straight-line depreciation of $50,000 annually is available. The machine has a current market value of $100,000. What is the cash flow from selling the machine if the tax rate is 40%? a. $50,000 c. $124,000 b. $100,000 d. $160,000 L & H 10e 72. Pebble Co. recently sold a used machine for $40,000. The machine had a book value of $60,000 at the time of the sale. What is the after-tax cash flow from the sale, assuming the company's marginal tax rate is 20 percent? a. $40,000 c. $44,000 b. $60,000 d. $32,000 Barfield 1

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The Alpha Beta Corporation disposes of a capital asset with an original cost of $85,000 and accumulated depreciation of $54,500 for $25,000. Alpha Beta's tax rate is 40%. Calculate the after-tax cash inflow from the disposal of the capital asset. (M) a. $2,200 c. $27,200 b. ($2,200) d. $31,500 Horngren

Sold at a Gain 42. Acme is considering the sale of a machine with a book value of $80,000 and 3 years remaining in its useful life. Straight-line depreciation of $25,000 annually is available. The machine has a current market value of $100,000. What is the cash flow from selling the machine if the tax rate 40%. a. $25,000 c. $92,000 b. $80,000 d. $100,000 D, L & H 9e

CMA EXAMINATION QUESTIONS

CAPITAL BUDGETING 42. Acme is considering the sale of a machine with a book value of $160,000 and 3 years remaining in its useful life. Straight-line depreciation of $50,000 annually is available. The machine has a current market value of $200,000. What is the cash flow from selling the machine if the tax rate is 40%? a. $50,000 c. $184,000 b. $160,000 d. $200,000 L & H 10e 2

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A corporation with a taxable income of $200,000 and a 40 percent tax rate is considering the sale of an asset. The original cost of the asset is $10,000, with $6,000 of its depreciated. How much total after-tax cash will be produced from the sale of the asset for $12,000? a. $10,400 d. $(3,200) b. $12,000 e. $8,800 c. $11,200 H&M

Initial Net Cash Investment After Tax Cash Inflow of Sale of Old Machine at a Gain 36. Eyring Industries has a truck purchased seven years ago at a cost of $6,000. At the time of purchase, the ultimate salvage value was estimated at $500, but salvage value was ignored in depreciation deductions. The truck is now fully depreciated. Assuming a tax rate of 40%, if the truck is sold for $500, the after-tax cash inflow for capital budgeting purposes will be: (E) a. $500. c. $200. b. $300. d. $100. G & N 9e Old Machine Sold at Book Value 50. Hatchet Company is considering replacing a machine with a book value of $400,000, a remaining useful life of 5 years, and annual straight-line depreciation of $80,000. The existing machine has a current market value of $400,000. The replacement machine would cost $550,000, have a 5-year life, and save $75,000 per year in cash operating costs. If the replacement machine would be depreciated using the straight-line method and the tax rate is 40%, what would be the net investment required to replace the existing machine? (D) a. $90,000. c. $330,000 b. $150,000 d. $550,000 D, L & H 9e 56. Big City Motors is trying to decide whether it should keep its existing car washing machine or purchase a new one that has technological advantages (which translate into cost savings) over the existing machine. Information on each machine follows: Old machine New machine Original cost $9,000 $20,000 Page 1 of 140

MANAGEMENT ADVISORY SERVICES Accumulated depreciation Annual cash operating costs Current salvage value of old machine Salvage value in 10 years Remaining life The incremental cost to purchase the new machine is a. $11,000. c. $13,000. b. $20,000. d. $18,000.

CAPITAL BUDGETING 5,000 9,000 2,000 500 10 yrs.

0 4,000 1,000 10 yrs.

Barfields

Old Machine Sold at a Gain 3 . Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value. Regal will sell this old equipment to a third party for $6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal’s net cash investment at the time of purchase if the old grinder is sold and the new one is purchased is a. $19,000 c. $17,400 b. $15,000 d. $25,000 CMA 1292 4-9 4

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A machine that cost $50,000 and is fully depreciated is sold for $10,000. The $10,000 is then used as a down payment on the purchase of a new machine costing $75,000. Assuming a 40% tax rate, the out-of-pocket cost of the new machine is: A. $75,000 C. $65,000 B. $71,000 D. $69,000 C&U

Old Equipment Sold at a Loss *. In making a decision to invest in a project the cash flow should be adjusted for their tax effect. Assume an income tax rate of 35% an old machine with a book value of P70,000 will be replaced by a new machine costing P150,000. The market value of the old machine is P50,000. The after tax investment outlay is (E) a. P82,500 c. P107,000 b. P93,000 d. P135,000 RPCPA 1085 *.

In deciding the investment in a project, cash flows should be adjusted for their tax effect. Assume an income tax rate of 35%. An old equipment with a book value of P15,000 will be replaced by a new equipment costing P50,000. The market value of the old equipment is P11,000. The after-tax investment outlay is (E) a. P34,400 c. P39,000

CMA EXAMINATION QUESTIONS

b. P37,600

d. P40,400

RPCPA 0581

Old Equipment Sold at a Loss, Additional Working Capital *. Diliman Republic Publishers, Inc. is considering replacing an old press that cost P800,000 six years ago with a new one that would cost P2,250,000. Shipping and installation would cost an additional P200,000. The old press has a book value of P150,000 and could be sold currently for P50,000. The increased production of the new press would increase inventories by P40,000, accounts receivable by P160,000 and accounts payable by P140,000. Diliman Republic’s net initial investment for analyzing the acquisition of the new press assuming a 35% income tax rate would be (D) a. P2,450,000 c. P2,600,000 b. P2,425,000 d. P2,250,000 RPCPA 0595 44. Superstrut is considering replacing an old press that cost $80,000 six years ago with a new one that would cost $245,000. The old press has a net book value of $15,000 and could be sold for $5,000. The increased production of the new press would require an investment in additional working capital of $6,000. The company's tax rate is 40%. Superstrut's net investment now in the project would be: (M) a. $256,000. c. $250,000. b. $242,000. d. $245,000. CMA adapted Old Machine Sold at a Loss, Cash Cost Savings on New Machine 5 . A company is considering replacing existing 2-year-old equipment. This project will require a discounted cash flow analysis to determine if the benefits exceed the costs. Year-end data regarding the existing and new equipment are shown below. Existing Equipment New Equipment Original cost $600,000 $540,000 Useful life (in years) 5 3 Remaining life (in years) 3 3 Annual depreciation $120,000 $180,000 Accumulated depreciation $240,000 N/A* Book value $360,000 N/A* Current cash disposal value $100,000 N/A* * Value is not applicable here. The new equipment will result in cash operating cost savings of $150,000 annually, before taxes. The new equipment would be purchased late in the current year to be operational at the beginning of the first year of the project. The existing equipment would be sold early in the first year of the project, meaning no further depreciation would be taken on it. The company has an Page 2 of 140

MANAGEMENT ADVISORY SERVICES effective income tax rate of 40%. Of the following, which are the correct figures to be used in the cash flow analysis for the first year of this proposed project? CIA 0596 III-78 After-Tax Cash Proceeds from Sale Tax Benefit from Sale Operating Savings of Existing Equipment of Existing Equipment A. $90,000 $100,000 $0 B. $60,000 $ 60,000 $104,000 C. $90,000 $100,000 $104,000 D. $60,000 $ 40,000 $156,000 Old Machine Traded-in 6 . A machine that cost $50,000 and is fully depreciated is allowed as a $10,000 trade-in on a machine costing $75,000. Assuming a 40% tax rate, the out-of-pocket cost of the new machine is: A. $75,000 C. $65,000 B. $71,000 D. $69,000 C&U Old Machine Traded-in, Avoidable Cost *. Key Corp. plans to replace a production machine that was acquired several years ago. Acquisition cost is P450,000 with salvage value of P50,000. The machine being considered is worth P800,000 and the supplier is willing to accept the old machine at a trade-in value of P60,000. Should the company decide not to acquire the new machine, it needs to repair the old one at a cost of P200,000. Tax-wise, the trade-in transaction will not have any implication but the cost to repair is tax-deductible. The effective corporate tax rate is 35% of net income subject to tax. For purposes of capital budgeting, the net investment in the new machine is (M) a. P540,000 c. P660,000 b. P610,000 d. P800,000 RPCPA 0597 Old Machine Traded-in, Other Assets Written Off, Avoidable Cost, Additional Working Capital *. Great Value Company is planning to purchase a new machine costing P50,000 with freight and installation costs amounting to P1,500. The old unit is to be traded-in will be given a trade-in allowance of P7,500. Other assets that are to be retired as a result of the acquisition of the new machine can be salvaged and sold for P3,000. The loss on retirement of these other assets is P1,000 which will reduce income taxes of P400. If the new equipment is not purchased, repair of the old unit will have to be made at an estimated cost of P4,000. This cost can be avoided by purchasing the new equipment. Additional gross working capital of P12,000 will be needed to support operation planned with the new equipment. The net investment assigned to the new machine for decision analysis is (D) CMA EXAMINATION QUESTIONS

CAPITAL BUDGETING a. P50,200 b. P52,600

c. P53,600 d. P57,600

RPCPA 1080

Initial Cash Outlay 7 . Lawson Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawson's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% of sales. What is the estimated total investment for this expansion? (E) A. $3.4 million. C. $4.6 million. B. $4.3 million. D. $4.9 million. CMA 1295 4-8 8

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Kline Corporation is expanding its plant, which requires an investment of $8 million in new equipment. Kline's sales are expected to increase by $6 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales, and accounts payable and other current liabilities are 10% of sales. What is the estimated total cash investment for this expansion? (E) A. $6.8 million. C. $9.2 million. B. $8.6 million. D. $9.8 million. Gleim

Tax on Sale of Old Machine 9 . A machine with a book value of $30,000 could be sold for $40,000. The corporation that owns the machine has taxable income of $35,000 and a 40 percent tax rate. What would be the tax on the sale of the machine? a. $0 d. $4,000 b. $10,000 e. $13,600 c. $6,000 H&M Opportunity Costs 11. A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is: A. $100,000 C. $250,000 B. $150,000 D. None of the above B&M 12. A firm has a general-purpose machine which has a book value of $500,000 and is sold for $600,000 in the market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project? A. $500,000 C. $570,000 Page 3 of 140

MANAGEMENT ADVISORY SERVICES B. $600,000

CAPITAL BUDGETING D. None of the above

B&M

Working Capital 23. For project A in year 2, inventories increase by $16,000 and accounts payable by $4,000. Calculate the increase or decrease in net working capital for year 2. (E) A. Increases by $12,000 C. Increases by $16,000 B. Decreases by $12,000 D. Decreases by $16,000 B&M 24. For project X, year 5 inventories decrease by $5,000, accounts receivable by $3,000 and accounts payables by $2,000. Calculate the increase or decrease in working capital for year 5. (E) A. Increases by $6,000 C. Increases by $8,000 B. Decreases by $6,000 D. Decreases by $7,000 B&M 34. A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is (E) A. an increase of $120,000. C. a decrease of $120,000. B. a decrease of $40,000. D. an increase of $60,000. Gitman 35. A corporation is considering expanding operations to meet growing demand. With the capital expansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is (E) A. an increase of $10,000. C. a decrease of $90,000. B. a decrease of $10,000. D. an increase of $80,000. Gitman Cash Inflow Before-tax Cash Inflow 69. C Corp. faces a marginal tax rate of 35 percent. One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10,000 (after-tax). C Corp. assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate. What is the pre-tax amount of the cash flow in year 4? (Round to the nearest dollar.) (M) a. $15,181 c. $9,868 CMA EXAMINATION QUESTIONS

b. $23,356

d. $43,375

Barfield

43. At the Bartholomew Company last year all sales were for cash and all expenses were paid in cash. The tax rate was 30%. If the after-tax net cash inflow from these operations last year was $10,500, and if the total before tax cash expenses were $35,000, then the total before-tax cash sales must have been: (M) a. $65,000. c. $45,000. b. $60,000. d. $50,000. G & N 9e Timing of Cash Flow 10 . Assume that the interest rate is greater than zero. Which of the following cash-inflow streams should you prefer? Gleim Year 1 Year 2 Year 3 Year 4 A. $400 $300 $200 $100 B. $100 $200 $300 $400 C. $250 $250 $250 $250 D. Any of these, since they each sum to $1,000. After-tax Net Cash Inflow for a Certain Year 5. You are given the following data for year 1. Revenue = $43; Total costs = $30; Depreciation = $3; Tax rate = 30%. Calculate the cash flow for the project for year 1. (E) A. $7 C. $13 B. $10 D. None of the above B&M 6. You are given the following data for year 1: Revenues = 100, Fixed costs = 30; Total variable costs = 50; Depreciation = $10; Tax rate = 30%. Calculate the after tax cash flow for the project for year 1. (E) A. $17 C. $10 B. $7 D. None of the above B&M After-Tax Net Cash Inflow 40. Last year the sales at Jersey Company were $200,000 and were all cash sales. The expenses at Jersey were $125,000 and were all cash expenses. The tax rate was 30%. The after-tax net cash inflow at Jersey last year from these operations was: (E) a. $37,500. c. $22,500. b. $60,000. d. $52,500. G & N 9e

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MANAGEMENT ADVISORY SERVICES 41. Last year a firm had taxable cash receipts of $800,000 and the tax rate was 30%. The after-tax net cash inflow from these receipts was (E) a. $800,000. c. $560,000. b. $640,000. d. $240,000. G & N 9e 46. Last year the sales at Seidelman Company were $700,000 and were all cash sales. The company's expenses were $450,000 and were all cash expenses. The tax rate was 35%. The after-tax net cash inflow at Seidelman last year was: (E) a. $700,000. c. $162,500. b. $250,000. d. $87,500. G & N 9e 11

. A project is expected to result in the following adjustments over the next year:  Cash sales increase by 400,000.  Expenses (except depreciation) increase by 180,000.  Depreciation increases by 80,000. Assume the corporate tax rate is 34%. The total relevant net cash flows during that year are A. 92,400 C. 172,400 B. 140,000 D. 220,000 CIA 0591 IV-52

Annual Cash Inflow 12 . A company considers a project that will generate cash sales of $50,000 per year. Fixed costs will be $10,000 per year, variable costs will be 40% of sales, and depreciation of the equipment in the project will be $5,000 per year. Taxes are 40%. The expected annual cash flow to the company resulting from the project is A. $15,000 C. $19,000 B. $9,000 D. $14,000 CIA 1193 IV-50 *.

Guemon Company is taking into account the replacement of an old machine now in use with a new machine costing P100,000. The replacement is expected to produce an annual cash savings of P22,500 before income taxes. The estimated useful life of the new machine is ten years with no residual value. The book value of the old machine is P37,500 and is expected to last for another five years. It is being depreciated at P8,000 per year. The income tax rate is 25%. The annual cash savings after tax is (M) a. P15,375 c. P17,375 b. P16,875 d. P20,520 RPCPA 0583

CMA EXAMINATION QUESTIONS

CAPITAL BUDGETING Total Cash Inflow 13 . The Phenom Corporation has an annual cash inflow from operations from its investment in a capital asset of $50,000 for five years. The corporation's income tax rate is 40%. Calculate the five years total after-tax cash inflow from operations. (M) a. $250,000 c. $150,000 b. $175,000 d. $50,000 Horngren Cash Outflow Before-Tax Cash Outflow 39. Consider a machine which costs $115,000 now and which has a useful life of seven years. This machine will require a major overhaul at the end of the fourth year which will cost "X" dollars. If the tax rate is 40%, and if the after-tax cash outflow for this overhaul is $3,600, then the amount of "X" in dollars is: (E) a. $6,000. c. $2,160. b. $9,000. d. $1,440. G & N 9e “End-of-Life” Cash Flow Based on Internal Rate of Return *. A company is considering putting up P50,000 in a three-year project. The company’s expected rate of return is 12%. The present value of P1.00 at 12% for one year is 0.893, for two years is 0.797, and for three years is 0.712. The cash flow, net of income taxes will be P18,000 (present value of P16,074) for the first year and P22,000 (present value of P17,534) for the second year. Assuming that the rate of return is exactly 12%, the cash flow, net of income taxes, for the third year would be (M) a. P7,120 c. P16,392 b. P10,000 d. P23,022 RPCPA 1081 Machine Sold at a Gain, Working Capital Released 14 . Garfield Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000, and Garfield expects to sell the equipment for $9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of $7,000 at its inception and another $...