IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 111:

  lrwinn Co. is considering an investment in a capital project. The sole outlay will be $800,000 at the outset of the project and the annual net after-tax cash inflow will be $216,309.75 for 6 years. The present value factors at lrwinn's 8% cost 01 capital are

  

  What is the breakeven time (BET)?

  A. 3.70 years.

  B. 4.57 years.

  C. 5.O0years.

  D. 6.O0years.

  Correct Answer: B

  Breakeven time is a more sophisticated version of the payback method. Breakeven time is `defined as the period required for the discounted cumulative cash inflows on a project to equal the discounted cumulative cash outflows (usually the initial cost). Thus, it is the time necessary for the present value of the discounted cash flows to equal zero. This period begins at the outset of a project, not when the initial cash outflow occurs. Accordingly, the BET is calculated as follows: Amount required in year 5:

  

  

• Question 112:

  When evaluating projects, breakeven time is best described as

  A. Annual fixed costs ?monthly contribution margin.

  B. Project investment + annual net cash inflows.

  C. The point where cumulative cash inflows on a project equal total cash outflows.

  D. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows.

  Correct Answer: D

  Breakeven time is a capital budgeting tool that is widely used to evaluate the rapidity of new product development. It is the period required for the discounted cumulative cash inflows for a project to equal the discounted cumulative cash outflows. The concept is similar to the payback period, but it is more sophisticated because it incorporates the time value of money. It also differs from the payback method because the period covered begins at the outset of a project, not when the initial cash outflow occurs.

• Question 113:

  The capital budgeting model that is generally considered the best model for long-range decision making is the

  A. Payback model.

  B. Accounting rate of return model.

  C. Unadjusted rate of return model.

  D. Discounted cash flow model.

  Correct Answer: D

  The capital budgeting methods that are generally considered the best for long-range decision 1making are the internal rate of return and net present value methods. These are both discounted cash flow methods.

• Question 114:

  Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. Based on a 6% annual interest rate, what is the discounted payback period for Henderson's fleet of trucks?

  A. 3.Syears.

  B. 3.98 years.

  C. 4.25years.

  D. 5.0 years.

  Correct Answer: C

  The discounted payback period for an investment, assuming a 6% discount1 can be found by accumulating each year's discounted net cash flows until the initial investment is recovered.

  

  Thus, the answer is something greater than four years. After four years, an additional $18,581 .75 ($500,000-- $481 .418.25) is needed. The calculation for the fifth year is $74,726 ($100,000 x .74726). Consequently, the discounted payback period is approximately 4.25 years [4 + ($18581.75 + $74,726)].

• Question 115:

  Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. If the net cash flow is $ 130,000 a year, what is the payback time for Henderson's fleet of trucks?

  A. 3years.

  B. 3.l5years.

  C. 3.85 years.

  D. 4years.

  Correct Answer: C

  payback period for an investment, ignoring the time value of money, can be found by accumulating each year's net cash flows until the initial investment is recovered. Therefore, dividing the $500,000 initial investment by the annual $130,000 inflow gives a payback time of 3.85 years.

• Question 116:

  Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500,000. Henderson expects its net increase in after4ax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. What is the payback reciprocal for Henderson's fleet of trucks?

  A. 29%

  B. 25%

  C. 0. 24%

  D. 20%

  Correct Answer: A

  The payback reciprocal for an investment is found by dividing 1 by the payback time. The pay back time for this investment is 3.Syears, and the pay back reciprocal is 1 divided by3.5, or29%.

• Question 117:

  Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. Ignoring the time value of money, how long will it take Henderson to recover the amount of investment?

  A. 3.5 years.

  B. 4.0 years.

  C. 4.2 years.

  D. 5 years.

  Correct Answer: A

  The payback period for an investment, ignoring the time value of money, can be found by accumulating each year's net cash flows until the initial investment is recovered. The amount accumulated after 3 years is $450,000. Thus, 50% ofYear4 cash flows is needed to recover the initial investment. The payback period is 3.5 years.

• Question 118:

  Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it

  A. Is a cost of operations that cannot be avoided?

  B. Is a cash inflow.

  C. Reduces the cash outlay for income taxes.

  D. Represents the initial cash outflow spread over the life of the investment.

  Correct Answer: C

  Depreciation is a noncash expense that is deductible for federal income tax purposes. Hence, it directly reduces the cash outlay for income taxes and is explicitly incorporated in the capital budgeting model.

• Question 119:

  A company is considering two mutually exclusive projects with the following projected cash flows: The company has a required rate of return of 8%. If the company's objective is to maximize shareholder wealth, which one of the following is the most valid reason for selecting one of the projects?

  

  A. The net present value of Project A is greater than the net present value of Project B, therefore select Project A.

  B. The net present value of Project A is less than the net present value of Project B, therefore select Project B.

  C. The internal rate of return of Project A is greater than the internal rate of return of Project B, therefore select Project A.

  D. The internal rate of return of Project A is less than the internal rate of return of Project B, therefore select Project B.

  Correct Answer: A

  Project A has a single cash inflow, calculated as the present value of a single payment in 4 years discounted at 8%:

  

  Project B has multiple even cash inflows, calculated as the present value of an ordinary

  

  The net present value of Project A is thus greater than that of Project B.

• Question 120:

  Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects. Brown is considering four independent projects with the following lRRs:

  

  Brown's cost of capital is 13%. Which one of the following project options should Brown accept based on IRR?

  A. Projects I and II only.

  B. Projects Ill and IV only.

  C. Project IV only.

  D. Projects I, II, Ill and IV.

  Correct Answer: B

  When sufficient funds are available, any capital project whose internal rate of return (IRR) exceeds the company cost of capital should be accepted.