[haseltonk]

Becker question…

A corporation is considering purchasing a machine that costs $100,000 and has a $20,000 salvage value. The machine will provide net annual cash inflows fo $25,000 per year and has a six-year life. The corporation uses a discount rate of 10%. The discount factor for the present value of a single sum six years in the future is 0.564. The discount factor for the PV of an annuity for six years is 4.355. what is the net present value of the machine?

A. 20,155

B. (2,405)

C. 8,875

D. 28,875

Correct answer is A. I don’t want to type the whole answer, but the cash outflow is $100k for the purchase, plus cash inflows of 108,875 for annual receipts plus cash inflows of 11,280 which is PV of the salvage value.

I keep getting thrown off on these types of questions because I don’t take the salvage value into account. Will I need to assume that the asset is being sold at the end of the depreciable life, even through it never says anything to that effect in the fact pattern? Or is this just a Becker quirk that isn’t representative of assumptions that need to be made during the actual exam?

Thanks!

[win2bet]

pretty simple question, would be happy to see one like this. just write out all the facts & you won't forget

,

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[Missy]

Many of the Becker questions are from previous exams so there's that.

Salvage value doesn't always mean the asset is sold at the end of the depreciable life, btw. It is a threshhold below which the asset is never depreciated so it remains with a book value on the balance sheet.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[TiffaNiffaNi]

I found that the CPA examination questions typically specified things like that…Questions that are ambiguous are typically weeded out IMO.

Any time I found a typo in an exam question or one that was otherwise poorly worded, I typically answered to the best of my ability but kept the thought in the back of mind that this was probably a question that was being trialed (i.e. didn't count). Definitely helps keep your confidence up, if nothing else 🙂

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Becker Self-Study

[okcpa2015]

Consider what NPV is, a decision making tool… not an entry you're about to book.

It's not that you won't sale it after 6 years, it's just the best guess is that in six years we can get $20K out of this. Just like the $25k inflows and 10% discount rate are a best guess.

You take a cashflow hit for the initial outlay of $100K, but since you'll be able to dispose of it later for $20K you have to include that in your decision making.

Make sense?

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[Anonymous]

It's very straight forward question.

I think of it like that:

Now I paid 100,000 (cash outflow at its present value for machine purchase)

Later I will receive 108,875 (annual cash inflows from machine discounted back)

Later I will receive 11,280 (salvage at its present value discount back)

I wish I get this question on exam day.

[haseltonk]

Thanks for that explanation OkCPA2015, that answer does make sense. I was thrown off since it never says that we are disposing of the asset, but that logic makes sense. Thanks.

[Author]

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