Discuss IMANET CMA Exam Topic 4 Question 74

A firm is considering a capital project for which the following information is available: An existing piece of equipment that would be disposed of to make room for new equipment has a historical cost of $370,000. It has a salvage value of $10000 and has been depreciated on a straight-line basis for 16 of the estimated 18 years of its useful life. The new equipment has a cost of $500,000 and the firm expects it will have to devote $20,000 in cash and $24,000 in accounts receivable to the new project. The firm's effective tax rate is 40%. The required net initial irwestrnent in the new project is?

A$544,000

B$534,000

C$518,000

D$498,000

Suggested Answer: C

The net initial investment consists of the initial outlay for new equipment ($500,000) plus the increase to working capital ($44,000) minus the net after-tax cash flow from the disposal of the old equipment ($26,000). The cash inflow from the disposal of the old equipment is calculated as follows:

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17 comments · newest first

Dalene 11 months ago

I’m surprised the total comes out to over $500k!

Alyce 11 months ago

Wait, how does the tax rate affect the initial investment?

Leslie 11 months ago

I agree, but don’t forget about the salvage value!

Benedict 11 months ago

I think the new equipment cost is $500,000, right?

Bonita 12 months ago

The historical cost of the old equipment is $370,000.

Rasheeda 12 months ago

I believe the total initial investment should include the new equipment cost plus the working capital, but I’m not confident about the exact numbers.

Patti 12 months ago

I remember a similar question where we had to account for depreciation and tax effects. I think we might need to adjust for the tax impact on the old equipment's disposal.

Kizzy 1 year ago

I'm a bit unsure about how to factor in the salvage value of the old equipment. Do we subtract it from the new equipment cost?

Tonja 1 year ago

I think we need to calculate the net initial investment by considering the cost of the new equipment and any working capital requirements.

German 1 year ago

I think I've got a good strategy here. I'll start by calculating the net book value of the existing equipment, then factor in the other costs and the tax rate.

Luis 1 year ago

Whoa, this is a lot of information to process. I better read through it carefully a few times before attempting to solve it.

Helene 1 year ago

I'm feeling pretty confident about this one. The calculations look straightforward, I just need to make sure I don't miss any important factors.

Latonia 1 year ago

Okay, let's break this down step-by-step. I think I can handle this if I just focus on the key details.

Nancey 1 year ago

Hmm, this seems a bit tricky. I'll need to really pay attention to the depreciation and tax rate information to get the right answer.

Hollis 1 year ago

This seems like a straightforward question about how HMOs determine rates for small groups. I'll need to think through the key factors they use, like demographics and community rating.

Steffanie 1 year ago

I think the key here is that the validation data should be treated independently from the training data. The imputed values in the training data shouldn't be directly applied to the validation data.

Elliott 1 year ago

This is a good test of my understanding of business assets. I'll review the options and try to apply the information I've learned in class to identify the correct answer.

IMANET CMA Exam - Topic 4 Question 74 Discussion