IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 101:

  When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project

  A. That generates cash flows for the longer period of time.

  B. Whose net after-tax flows equal the initial investment?

  C. That has the greater accounting rate of return.

  D. That has the greater profitability index.

  Correct Answer: D

  The profitability (excess present value) index facilitates the comparison of investments that have different initial costs. The profitability index equals the present value of future net cash inflows divided by the initial cash investment. The investment with the greater profitability index will be the preferred investment. However, if investments are mutually exclusive, the net present value method may be the better way of ranking projects. The excess present value index indicates the best return per dollar invested but does not consider the alternative possibilities for unused funds. Thus, the smaller of the mutually exclusive projects may have the higher index, but the incremental investment in the larger project may make it the better choice. For example, an $8,000,000 project may be a better use of funds than a combination of a $6,000,000 project with a higher index and the best alternative use of the remaining $2,000,000.

• Question 102:

  Fitzgerald Company is planning to acquire a $250,000 machine that will provide increased efficiencies, thereby reducing annual operating costs by $80,000. The machine will be depreciated by the straight-line method over a 5-year life with no salvage value at the end of 5 years. Assuming a 40% income tax rate, the machine's payback period is

  A. 3.13 years.

  B. 8.33 years.

  C. 3.68 years.

  D. 5.21 years.

  Correct Answer: C

• Question 103:

  The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickenss' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Further more, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Eederal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. What is the approximate payback period on Dickins' new machine?

  A. 1.05years.

  B. 1.S4years.

  C. 1.33years.

  D. 2.22 years.

  Correct Answer: B

  When annual cash inflows are uniform, the payback period is calculated by dividing the initial investment ($210,000) by the annual net cash inflows ($136,800). Dividing $210,000 by $136,800 produces a payback period of 1.54 years.

• Question 104:

  Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this Pjpe, Whatney uses a goal of a 4-year payback period. To meet Whatney's desired payback period, the press must produce a minimum annual before-tax operating cash savings of

  A. $90,000

  B. $110,000

  C. $114,000

  D. $150,000

  Correct Answer: B

  Payback is the number of years required to complete the return of the original Investment. Given a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-tax cash flow. The desired payback period is 4 years, so the constant after-tax annual cash flow must be $90,000 ($360,000 + 4). Assuming that the company has sufficient other income to permit realization of the full tax savings, depreciation of the machine will shield $60,000 ($360,000 + 6) of income from taxation each year, an after-tax cash savings of $24,000 ($60,000 x 40%). Thus, the machine must generate an additional $66,000 ($90,000 -- $24,000) of after-tax cash %avings from operations. This amount is equivalent to $110,000 [$66,000 + (1.0-- .4)] of before-tax operating cash savings.

• Question 105:

  The bailout payback method

  A. Incorporates the time value of money.

  B. Equals the recovery period from normal operations.

  C. Eliminates the disposal value from the payback calculation.

  D. Measures the risk if a project is terminated.

  Correct Answer: D

  The payback period equals the net investment divided by the average expected cash flow, resulting in the number of years required to recover the original investment. The bailout payback incorporates the salvage value of the asset into the calculation. It determines the length of the payback period when the periodic cash inflows are combined with the salvage value. Hence, the method measures risk. The longer the payback period, the more risks' the investment.

• Question 106:

  The payback reciprocal can be used to approximate a project's

  A. Profitability' index.

  B. Net present value.

  C. Accounting rate of return if the cash flow pattern is relatively stable.

  D. Internal rate of return if the cash flow pattern is relatively stable.

  Correct Answer: D

  The payback reciprocal (1 + payback) has been shown to approximate the internal rate of return' (IRR) when the periodic cash flows are equal and the life of the project is at least twice the payback period:

• Question 107:

  Which one of the following statements about the payback method of investment analysis is correct? The payback method

  A. Does not consider the time value of money.

  B. Considers cash flows after the payback has been reached.

  C. Uses discounted cash flow techniques.

  D. Generally leads to the same decision as other methods for long-term projects.

  Correct Answer: A

  The payback method calculates the amount of time required to complete the return of the original investment, i.e.1 the time it takes for a new asset to pay for itself. Although the payback method is easy to calculate, it has inherent problems. The time value of money and returns after the payback period are not considered.

• Question 108:

  The length of time required to recover the initial cash outlay of a capital project is determined by using the A. Discounted cash flow method.

  B. Payback method.

  C. Weighted net present value method.

  D. Net present value method.

  Correct Answer: B

  The payback method measures the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment by the average expected cash inflows to be generated, resulting in the number of years required to recover the original investment. The payback method gives no consideration to the time value of money, and there is no consideration of returns after the payback period.

• Question 109:

  Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper is subject to a 40% income tax rate. To meet the company's payback goal, the sorter must generate reductions in annual cash operating costs of

  A. $60,000

  B. $100,000

  C. $150,000

  D. $190,000

  Correct Answer: D

• Question 110:

  A characteristic of the payback method (before taxes) is that it

  A. Incorporates the time value of money.

  B. Neglects total project profitability'.

  C. Uses accrual accounting inflows in the numerator of the calculation.

  D. Uses the estimated expected life of the asset in the denominator of the calculation.

  Correct Answer: B

  The payback method calculates the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment required by the average expected cash, 1flow to be generated, resulting in the number of years required to recover the original investment. Payback is easy to `calculate but has two principal problems: it ignores the time value of money, and it gives no consideration to returns, after the payback period. Thus, it ignores total project profitability'.