CFA Practice Question

CFA Practice Question

Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the cash outflow at t = 0?

Purchase price of new machine: $8,000
Installation charge: $2,000
Market value of old machine: $2,000
Book value of old machine: $1,000
Inventory decrease if new machine is installed: $1,000
Accounts payable increase if new machine is installed: $500
Tax rate: 35%
Cost of capital: 15%
A. -6,460
B. -8,980
C. -6,850
Explanation: Cost plus installation: ($10,000)
Sale of old machine: $+2,000
Tax effect of sale: ($1,000 x 0.35) = (350)
Decrease in working capital: $1,500
Total investment at t = 0: ($6,850)

User Contributed Comments 13

User Comment
shasha requirement for net working capital was Decreased, 'coz at t0 NWC was increased by 1,500.
junli68 what does the tax effect of sale mean here? Thanks.
chenyx Both inventory decrease and payable increase are not cash outflow. They both decrease working capital.
Ali1 tax effect of the sale is the book value of the machine multiplied by the tax rate. Becuse you've paid taxes on the rest o the amount depreciated, you only pay tax on the book value.
mtcfa Wrong ALI... the tax you're paying is related to the GAIN on the sale.
Birdy101 (Sale price - BV )* tax rate = tax liability due to the sale
vadklim To chenyx:
Due to this decrease in working capital the agregate cash outflow for working capital maintanance was 1500 less than it would be othervise.
iambroke chenyx:

simply.....Inventory decreased...therefore you didnt pay that much in cash to acquire it

also accounts payable increased...=> more cash in hand.
ofabian t=0 = right now. there shouldn't be any tax cash outflows immediately.
JeffAu Cost of capital 15% totally useless here lol
mkunkel28 I guess it could be implied but it never says anything about selling the old machine...
ishanj196 ^mkunkel28 absolutely true. This is what got me the answer wrong -.-
pigletin why add back decrease in inventory?
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