CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

Which of the following statements with respect to calculation of operating cash flows on a replacement project is untrue?
A. If the new machine results in higher depreciation than the old machine, then this will add to the annual operating cash flow. If the new machine requires an increase in working capital, then this will be deducted from the operating cash flow.
B. The incremental cash flows are usually a result of after tax cost savings as opposed to new sales.
C. During the terminal year, even if the new equipment is sold for more than its book value at that time, the entire proceeds of the sale will be added to operating cash flow, since book value figures are irrelevant.
Explanation: While book values are irrelevant from a cash flow point of view, the fact is the difference between the proceeds a company will get on the sale of an equipment and its book value, is taxable, and that has cash flow implications. Therefore, the proceeds of the sale of the equipment should be reduced by the tax that will have to be paid on the gain, or between the actual proceeds and the book value of the equipment.

User Contributed Comments 3

User Comment
anricus28 D could be incorrect. Although this is an outflow at Time 0, it is strictly speaking not considered part of the operating cash flow here as it is part of the initial outlay???
ThePessimist Don't confuse capital budgeting items (initial outlay) with accounting items (CFO).
kazec ThePessimist, I'm pretty sure that in the context of capital budgeting, investment (or recovery) of working capital is non-O cash flow, as opposed to the case in FRA.
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