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IMANET Exam CMA Topic 2 Question 11 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 11
Topic #: 2
[All Certified Management Accountant Questions]

Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 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, which 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 histoncal 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%. The total after-tax cash inflow relevant to Calamity Cauliflower's disposal of the old equipment is

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Suggested Answer: A

The relevant after-tax cash inflow consists of the proceeds on the disposal ($8.000) plus the tax benefit ($1,600).


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