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IMANET Exam CMA Topic 3 Question 9 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 9
Topic #: 3
[All Certified Management Accountant Questions]

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

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Suggested Answer: B

The relevant after-tax annual cash inflow for the project consists of the gross cash inflow

,($10O.000) minus income tax expense ($100,000 x AO). or $60,000.

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