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IMANET CMA Exam - Topic 3 Question 34 Discussion

Actual exam question for IMANET's CMA exam
Question #: 34
Topic #: 3
[All CMA Questions]

A company is considering the purchase of a new machine to replace a five-year old machine and has gathered the following information: Purchase price of new machine $50,000 Installation cost of new machine 4,000 Market value (selling price) of the old machine 5,000 Book value of the old machine 2,000 Increase in net working capital if new machine is installed 1,000 Effective income tax rate 40% It the company replaces the old machine with the new machine, what is the cash flow in period 0?

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Suggested Answer: B

The net initial investment for a capital project consists of three components: the purchase of new equipment, the increase in working capital, and the after-tax proceeds from the disposal of old equipment For this company, the first of these is $54,000 ($50,000 + $4,000), and the second is $1,000. The calculation of the after-tax proceeds from the disposal of the old equipment is as follows:


by Stephaine at May 04, 2022, 06:51 PM

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Clarence
4 months ago
Totally with you on that, it’s definitely $(51,200)!
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Latosha
4 months ago
Wait, how does the tax rate affect this calculation?
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Kirby
4 months ago
I think the cash flow should be $(51,200). Sounds right!
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Chantay
4 months ago
Don't forget the $1,000 increase in working capital!
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Emelda
5 months ago
The new machine costs $50,000 plus $4,000 for installation.
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Tammi
5 months ago
If I recall correctly, we should sum the purchase price, installation cost, and the increase in working capital, then subtract the market value of the old machine. I think that leads to option B, but I’m not entirely sure.
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Amira
5 months ago
I’m a bit confused about the increase in net working capital. Does that get added to the cash flow calculation right away?
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Laura
5 months ago
I remember a similar practice question where we had to calculate the initial cash outflow. I think we need to subtract the market value of the old machine from the total costs.
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Dante
5 months ago
I think the cash flow in period 0 should include the purchase price and installation cost, but I'm not sure how to factor in the market value of the old machine.
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Erick
5 months ago
Hmm, I'm a bit unsure about this one. Ignoring the customer doesn't seem like a good idea, but I'm not sure if continuing to text them is the right move either. Maybe the email option is the safest bet, even if it's not the most personal approach.
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Arlen
5 months ago
Ah, I remember learning this in class. The assumptions are that the errors are independent, normally distributed with zero mean and constant variance. So I'm going to go with option D for this one.
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Fannie
5 months ago
Hmm, I'm a bit unsure about this one. I remember learning about jTAG, but I can't quite recall the specifics of how it acquires data. I'll have to think this through carefully.
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