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IMANET Exam CMA Topic 4 Question 10 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 10
Topic #: 4
[All Certified Management Accountant Questions]

Calamity Cauliflower Corporation is conceding 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, witch will be depreciated on a straight-line basis, is expected to have a sage value of $10,000. The exiting 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%. The net initial investment required for Calamity Cauliflower to undertake this capital project is

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Suggested Answer: C

The net initial investment consists of the initial outlay for new equipment ($160,000) plus the increase to working capital ($24,000) minus the net after-tax cash flow from the disposal of the old equipment ($9,600).

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