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IMANET CMA Exam - Topic 6 Question 40 Discussion
Topic #: 6
Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net caring amount of $0. a tax basis of $150,000. a cost to remove of $80,000. and scrap salvage value of $20,000. Metrejean's effective tax rate is 40%. What is the appropriate enc$-of-life'' cash flow related to these items that should be used in the analysis?
The tax basis of $150,000 and the $80,000 cost to remove are deductible expenses, but the $20,000 scrap value is an offsetting cash inflow. Thus, the taxable loss is $210,000 ($150,000 + $80,000 ---$20,000). At a 40% tax rate, the $210,000 loss will produce a tax savings (inflow) of $84,000. According. the final cash flows will consist of an outflow of $80,000 (cost to remove) and inflows of $20,000 (scrap) and $84,000 (tax savings), a net inflow of $24,000.
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