AICPA CPA-Business Exam - Topic 3 Question 78 Discussion

Actual exam question for AICPA's CPA-Business exam

Question #: 78
Topic #: 3

The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40 percent.

What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?

A$(85,000)

B$(90,000)

C$(96,000)

D$(105,000)

Show Suggested Answer

Suggested Answer: A

Choice 'a' is correct. 7.0 percent cost of funds from retained earnings.

The cost of retained earnings is equal to the rate of return required by the firm's common shareholders (or, in effect, the return 'lost' by them when the firm chooses to fund with retained earnings). While oftentimes this rate is somewhat subjective, we are given the facts to exactly answer the question in this case. The stock is currently selling for $100/share, and the dividend is given at $7/share.

$7 / $100 = 7%

Choices 'b', 'c', and 'd' are incorrect, per the above Explanation:/calculation.

by Colette at Dec 13, 2023, 06:54 AM

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Vashti

3 months ago

Just to clarify, the salvage value doesn’t factor into the initial cash outflow, right?

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Zena

3 months ago

I think the net cash outflow is spot on at $(105,000).

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Nieves

3 months ago

Wait, are we sure about those transport and installation costs?

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Magdalene

4 months ago

Definitely going with option D, that makes sense!

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Jonelle

4 months ago

The total initial cost is $90,000 + $6,000 + $9,000 = $105,000.

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Merrilee

4 months ago

I believe the initial cash outflow is just the purchase price plus the transport and installation costs, but I'm a bit confused about how the tax rate plays into this.

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Carman

4 months ago

This question feels similar to one we did on capital budgeting, but I can't remember if we just add everything up or if there's something else we need to consider first.

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Derick

4 months ago

I think the total cash outflow should include the purchase price plus transport and installation, but I can't recall if we also factor in the salvage value at this stage.

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Pearline

5 months ago

I remember we calculated total initial costs in class, but I'm not sure if I included all the transport and installation fees correctly.

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Deandrea

5 months ago

I've got a good strategy here. I'll start by calculating the total initial investment, then factor in the tax savings from depreciation to get the net cash outflow.

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Beth

5 months ago

Hmm, I'm a little confused about how to handle the depreciation and tax implications. I'll need to make sure I'm accounting for those properly.

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Laquita

5 months ago

This seems like a pretty straightforward capital budgeting problem. I just need to calculate the initial investment and then I should be able to determine the right answer.

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Lenna

5 months ago

Okay, I think I've got it. Let's see, the initial investment is $90,000 for the machine, plus $6,000 for transportation, and $9,000 for installation, so that's a total of $105,000. Then we need to subtract the $5,000 salvage value and the tax savings from depreciation. This should give us the net cash outflow.

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Ty

5 months ago

Hmm, I'm not sure about the other options like association and goto. I'll have to think about those and see if they make sense in a flowchart.

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Mary

5 months ago

I'm a bit confused by this question. The conceptual framework has different levels, but I'm not entirely sure what each one covers. I'll have to guess on this one and hope for the best.

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Candida

5 months ago

Hmm, I'm a bit unsure about this one. The options seem to cover a range of different features, so I'll need to make sure I understand which ones are specifically related to OLTP workloads.

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Shad

5 months ago

Hmm, I'm not sure about this one. Sending emails through Outlook could work, but it might not be the most efficient solution. I'll need to think through the pros and cons of each option.

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Arlette

5 months ago

The GET request syntax seems a bit off. I'll closely inspect the URL and parameters to make sure they're formatted correctly.

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Carline

5 months ago

I think a private blockchain is mainly used to limit user access and permissions, but I'm not completely sure if that's the only reason.

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Glenn

9 months ago

Option A all the way! It's like the machine is giving you a $5,000 discount just for being its new owner. Gotta love those end-of-life perks.

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Shalon

8 months ago

Yeah, I agree. It's a smart financial move to go with the option that gives you the most savings.

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Natalie

8 months ago

A) $(85,000)

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Bette

8 months ago

I see your point, but I still think option A is the better choice here.

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Audra

8 months ago

B) $(90,000)

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Denise

8 months ago

I think option A makes the most sense too. It's a good deal with that salvage value factored in.

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Devorah

9 months ago

A) $(85,000)

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Claudia

10 months ago

Hmm, this is a tough one. I'm going to have to go with option B. The question says the machine can be purchased for $90,000, so that seems like the obvious net cash outflow at the beginning of the first year.

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Telma

10 months ago

This is tricky, but I think the correct answer is C. The question mentions the machine can be depreciated over 5 years, so the net cash outflow should include the full $90,000 purchase price plus the $6,000 transportation and $9,000 installation costs.

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Adolph

8 months ago

C) $(96,000)

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Arminda

8 months ago

B) $(90,000)

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Geraldine

9 months ago

A) $(85,000)

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Yasuko

10 months ago

I'm not sure about this one. I think option D might be correct since it includes the transportation and installation costs, which add up to $15,000 on top of the $90,000 purchase price.

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Jolanda

8 months ago

I think option D might be correct since it includes the transportation and installation costs, which add up to $15,000 on top of the $90,000 purchase price.

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Ronnie

9 months ago

D) $(105,000)

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Salena

9 months ago

C) $(96,000)

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Corinne

9 months ago

B) $(90,000)

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Terina

9 months ago

A) $(85,000)

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Vi

10 months ago

Option A looks good to me. The net cash outflow at the beginning of the first year is the purchase price of the machine minus the estimated salvage value, which comes out to $90,000 - $5,000 = $85,000.

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