# Equipment and cash

**ID:** `ac-capex`  
**Topic:** accounting  
**Level:** foundation

## Prompt

A warehouse buys equipment for 144 cash at the start of the year. Walk through the first year across all three statements.

## Assumptions

Amounts $m. Six-year straight-line life, no salvage. Book=tax depreciation. 25% tax shield usable immediately. No financing, WC or dividends. The company has sufficient other taxable income to absorb the deduction.

## Inputs

### Original

- `cost`: 144
- `life`: 6
- `tax`: 0.25

### Retry

- `cost`: 180
- `life`: 6
- `tax`: 0.3

## Reference calculations

- `depreciation`: original 24.0; retry 30.0. Formula: `cost/life`
- `netIncome`: original -18.0; retry -21.0. Formula: `-cost/life*(1-tax)`
- `cfo`: original 6.0; retry 9.0. Formula: `cost/life*tax`
- `cash`: original -138.0; retry -171.0. Formula: `-cost+cost/life*tax`
- `netPPE`: original 120.0; retry 150.0. Formula: `cost-cost/life`
- `retainedEarnings`: original -18.0; retry -21.0. Formula: `-cost/life*(1-tax)`

## Intermediate calculations

- `first`: `['depreciation: 144/6 = 24', 'netIncome: -144/6*(1-0.25) = -18', 'cfo: 144/6*0.25 = 6', 'cash: -144+144/6*0.25 = -138', 'netPPE: 144-144/6 = 120', 'retainedEarnings: -144/6*(1-0.25) = -18']`
- `retry`: `['depreciation: 180/6 = 30', 'netIncome: -180/6*(1-0.3) = -21', 'cfo: 180/6*0.3 = 9', 'cash: -180+180/6*0.3 = -171', 'netPPE: 180-180/6 = 150', 'retainedEarnings: -180/6*(1-0.3) = -21']`

## Discussion prompts

- If there were no current cash tax benefit, what would happen to cash, and why?
- If a six-year useful life changes to three years with the same tax capacity, what happens to first-year earnings and cash? Separate timing from lifetime economics.

## Review notes

Without a current cash tax benefit, CFO has no cash tax saving and cash falls by the full capex. Net income may still reflect deferred taxes if recognition criteria are met; ask the candidate to state that assumption.

Common misconception:
- Depreciation addback creates cash independently of taxes. Follow up: If there were no current cash tax benefit, what would happen to cash, and why?

**Provenance:** Original fictional scenario and wording; standard finance concepts. Not copied from course questions.
**Review status:** Formula-tested; expert review pending

Numeric references support calculation practice only. They do not grade explanations or establish interview readiness.

Source: [`../../question-bank.json`](../../question-bank.json).