[Anonymous]

A company is considering two projects, which have the following details:

Project A Project B

Expected sales $1,000 $1,500

Cash operating expense $400 $700

Depreciation $150 $250

Tax rate 30% 30%

Which project would provide the largest after-tax cash inflow?

I’m absolutely stuck, answer is project B with an inflow of $635. This is from the 2013 AICPA hand out questions and is considered one of the difficult questions. I have no idea how they got $635.

Thank you in advanced!

[Anonymous]

To get the $635 answer, you first find the pre-tax cash inflow, which is $800 ($1,500 expected sales – $700 cash operating expense). Then you determine what the after-tax cash inflow is (disregarding depreciation for the moment). To do that, you multiply the $800 x (1-30%), which gives you $560. And finally, while depreciation does not itself represent a cash outflow, the tax benefit received would be another cash inflow, so you now multiply the depreciation of $250 x 30%, which equals $75. Finally, $560 + $75 = $635. Hope this helps!

[Anonymous]

To get the $635 answer, you first find the pre-tax cash inflow, which is $800 ($1,500 expected sales – $700 cash operating expense). Then you determine what the after-tax cash inflow is (disregarding depreciation for the moment). To do that, you multiply the $800 x (1-30%), which gives you $560. And finally, while depreciation does not itself represent a cash outflow, the tax benefit received would be another cash inflow, so you now multiply the depreciation of $250 x 30%, which equals $75. Finally, $560 + $75 = $635. Hope this helps!

[Anonymous]

1) Calculate operating net income. Sales less Operating Expenses.

2) Take that amount, and calculate the amount net of taxes. Net income * (1 – tax rate)

3) Now we need to add in the tax break they get for the depreciation expense. So we take the depreciation expense, multiply it by the tax rate and add it to the income, net of taxes. Net income + Depreciation Expense * Tax Rate.

Project A:

1) 1000 – 400 = 600

2) 600 * (1 – 30%) = 600 * 70% = 420

3) 420 + 150 * 30% = 420 + 45 = 465.

Project B:

1) 1500 – 700 = 800

2) 800 * (1 – 30%) = 800 * 70% = 560

3) 560 + 250 * 30% = 560 + 75 = 635

The key to remember is that we're calculating out the cash flows, not revenue. Depreciation expense plays a part when working out the income statement, but has no impact on cash other than the tax break it provides.

[Anonymous]

1) Calculate operating net income. Sales less Operating Expenses.

2) Take that amount, and calculate the amount net of taxes. Net income * (1 – tax rate)

3) Now we need to add in the tax break they get for the depreciation expense. So we take the depreciation expense, multiply it by the tax rate and add it to the income, net of taxes. Net income + Depreciation Expense * Tax Rate.

Project A:

1) 1000 – 400 = 600

2) 600 * (1 – 30%) = 600 * 70% = 420

3) 420 + 150 * 30% = 420 + 45 = 465.

Project B:

1) 1500 – 700 = 800

2) 800 * (1 – 30%) = 800 * 70% = 560

3) 560 + 250 * 30% = 560 + 75 = 635

The key to remember is that we're calculating out the cash flows, not revenue. Depreciation expense plays a part when working out the income statement, but has no impact on cash other than the tax break it provides.

[Anonymous]

Guys, I am very thankful. I read this write before taking my BEC exam today. Best part, 3 of these exact kind of questions showed up. Helped me nab some additional points. I was so confused when I saw depreciation in the question earlier haha. If I had a way to upvote you both.

Thank you thank you! ;D

[Anonymous]

Guys, I am very thankful. I read this write before taking my BEC exam today. Best part, 3 of these exact kind of questions showed up. Helped me nab some additional points. I was so confused when I saw depreciation in the question earlier haha. If I had a way to upvote you both.

Thank you thank you! ;D

[stoleway]

Becareful, you might be violating the disclosure policy

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[stoleway]

Becareful, you might be violating the disclosure policy

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Author]

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