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IMANET CMA Exam - Topic 2 Question 17 Discussion
Topic #: 2
The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18.000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine Es expected to produce 4.000 units per year with a selling price of $500 and combined direct materials and direct 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 Dickins has a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis?
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 of variable costs), a total of $200.000 per year for 4.000 units. This amount will be subject to taxation, as will the $10,000 gain on sale of the irwestrnent, resetting in taxable income of $210,000. No depreciation will be deducted in the tenth year because the asset was fully depreciated after 5 years. Because the asset was fully depreciated (book value was $0), the $10,000 received as salvage value is fully taxable. At 40%, the tax on $210,000 is $84,000. After subtracting $84000 of tax expense from the $210,000 of inflows the net inflows amount to $126,000.
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