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IMANET CMA Exam - Topic 6 Question 18 Discussion
Topic #: 6
The Dickins Corporation is considering the acquisition of a new machine at a cost of $ 180.000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value, Dickins has a marginal tax rate of 40%. What is the net cash flow for the third year that Dickins should use in a capital budgeting analysis?
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 variable costs), a total of $200,000 per year for 4,000 units. This amount will be subject to taxation, However, for the first 5 years, a depreciation deduction of $42,000 per year ($210,000 cost + 5 years) will be available. Thus, annual taxable income will be $158,000 ($200,000 ---$42,000). At a 40% tax rate, income tax expense will be $63,200, and the net cash inflow will be $136,800 ($200,000 --- $63200).
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