CFA Level I · CFA Level I Exam · Capital Investments and Capital Allocation
A project generates annual sales of $800,000 and cash operating expenses of $500,000. Depreciation is $100,000 per year, and the tax rate is 30%. The annual after-tax operating cash flow is closest to:
After-tax operating cash flow is about $240,000. Operating income after depreciation is $200,000, taxes at 30% leave $140,000, and adding back the non-cash $100,000 depreciation gives $240,000. Ignoring the depreciation tax shield would understate the cash flow at $210,000.
- A$210,000
- B$240,000Correct
- C$300,000
Explanation
Net income effect: (800,000 - 500,000 - 100,000) x 0.70 = 140,000. Add back depreciation of 100,000 to get 240,000. Using 210,000 results from ignoring the depreciation tax shield: 300,000 x 0.70 = 210,000. The 300,000 figure ignores taxes.
Did you get it right without looking?
One question tells you little. A timed set on Capital Investments and Capital Allocation shows your real accuracy, how long you take and where you lose marks.
More Capital Investments and Capital Allocation questions
- A company spent 2 million last year on a feasibility study for a new plant. The plant now has a positive NPV of 1.5 million before consideri…
- A company evaluates a single stand-alone project with conventional cash flows (one initial outflow followed by inflows). The project's inter…
- When estimating incremental cash flows for a proposed capital project, which of the following items is most likely excluded from the analysi…
- A project requires an initial outlay of $60,000 and is expected to generate cash inflows of $20,000 in Year 1, $25,000 in Year 2, $30,000 in…
- An analyst has a budget of 100 million and three indivisible projects. Project X needs 60 million with NPV of 14 million. Project Y needs 40…
- An analyst reviewing a manufacturer's capital budgeting process notes that managers routinely choose projects with the highest accounting ea…