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CMA Final · Strategic Financial Management · Investment Decisions, Project Planning and Control

Narmada Textiles is considering a machine costing Rs 12,00,000 with a 4-year life and nil salvage value, depreciated straight-line. Annual profit before depreciation and tax is Rs 5,00,000. Tax rate is 30%. What is the annual after-tax operating cash flow?

Annual after-tax cash flow is profit before depreciation less tax on profit after depreciation. Depreciation is Rs 3,00,000, taxable profit Rs 2,00,000, tax Rs 60,000, so cash flow is Rs 4,40,000.

  1. ARs 3,50,000
  2. BRs 3,80,000Correct
  3. CRs 4,10,000
  4. DRs 3,00,000

Explanation

Depreciation = 12,00,000/4 = 3,00,000. Profit before tax = 5,00,000 - 3,00,000 = 2,00,000; tax at 30% = 60,000. Cash flow = 5,00,000 - 60,000 = 4,40,000. Check: PAT 1,40,000 + depreciation 3,00,000 = 4,40,000. Hence the option must be Rs 4,40,000, which is not listed in this form.

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