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IMANET Exam CMA Topic 5 Question 24 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 24
Topic #: 5
[All Certified Management Accountant Questions]

Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25.000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value; Regal will sell this old equipment to a third party for $6,000 cash, The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value Assuming a 40% marginal tax rate. Regale's net cash investment at the time of purchase if the old gander is sold and the new one purchased is

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Suggested Answer: C

The old machine has a carrying amount of $10,000 [$15,000 cost---S ($15,000 cost +15 years) depreciation]. The loss on the sale is $4,000 ($10,000--- $6,000 cash received), and the tax savings from the loss is $1,600 ($4,000 x 40%). Thus, total inflows are $7,600 The only outflow is the $25,000 purchase price of the new machine. The net cash investment is therefore $17,400 ($25,000--- $7,600).


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