IMANET Exam CMA Topic 3 Question 9 Discussion

Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24000 of working capital in addition to an immediate outlay of $160 .000 for new equipment. The project is expected to generate $100 .000 of annual income for 10 years. At the end of that time, the new equipment, witch will be depreciated on a straight-line basis, is expected to have a salvage value of $ 10.000. The existing equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's relevant after-tax annual cash inflow from the ongoing operations of the project is