IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 141:

  What is the approximate lRP for a project that costs $50,000 and provides cash inflows of$20,000for3years?

  A. 10%

  B. 12%

  C. 22%

  D. 27%

  Correct Answer: A

  The factor to use is 2.5, which is found at a little under 10% on the 3-year line of an annuity table

• Question 142:

  Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for 5 years?

  A. NPV = $36,274.

  B. NPV = $20,000.

  C. IRR=14%.

  D. IRR is greater than 10%.

  Correct Answer: D

  The total cash inflows are only $70,000 (5 x $14,000). Thus, whatever the discount rate, the j1NPVwill be less than $20000 ($70,000--$50,000).The return in the first year is $14,000, or28% of the initial investment. Since the same $14,000 flows in each year, the IRR is going to be greater than 10% (actually, it is almost 14%).

• Question 143:

  Comp techs is an all-equity firm that is analyzing a potential mass communications project which will require an initial after-tax cash outlay of $100,000, and will produce after-tax cash inflows of $12,000 per year for 10 years. In addition, this project will have an after-tax salvage value of $20,000 at the end of Year

  10. If the risk-free rate is 5 percent, the return on an average stock is 10 percent, and the s of this project is 1.80, then what is the project's NPV?

  A. $(14544)

  B. $4,944

  C. $(37,408)

  D. $(32,008)

  Correct Answer: D

  The cost of capital must be determined in order to calculate NPV.Using the Capital Asset Pricing Model to determine the cost of capital where P equals the required rate of return on equally capital, PF equals the risk-free rate, PM equals the market return, and p equals the p coefficient, then

  

  The net present value of the project is thus the difference between the initial cost and the sum of the present value of an annuity' of $12,000 for 10 years at 14% and the present value of $20,000 in 10 years at 14%. The present value factors are found in the tools section of CMA Test Prep.

  

• Question 144:

  Dr. G invested $10.000 in a lifetime annuity for his granddaughter Emily. The annuity is expected to yield $400 annually forever. What is the anticipated internal rate of return for the annuity?

  A. Cannot be determined without additional information.

  B. 4.0%

  C. 2.5%

  D. 8.0%

  Correct Answer: B

• Question 145:

  The net present value of a proposed investment is negative; therefore, the discount rate used must be

  A. Greater than the project's internal rate of return.

  B. Less than the project's internal rate of return.

  C. Greater than the firm's cost of equity.

  D. Less than the risk-free rate.

  Correct Answer: A

  The higher the discount rate, the lower the NPV. The IRR is the discount rate at which the NPV is zero. Consequently, if the NPV is negative1 the discount rate used must exceed the IRR.

• Question 146:

  The net present value method of capital budgeting assumes that cash flows are reinvested at

  A. The risk-free rate.

  B. The cost of debt.

  C. The rate of return of the project.

  D. The discount rate used in the analysis.

  Correct Answer: D

  The NPV method assumes that periodic cash inflows earned over the life of an investment are reinvested at the company's cost of capital (i.e., the discount rate used in the analysis). This is contrary to the assumption under the internal rate of return method, which assumes that cash inflows are reinvested at the internal rate of return. As a result of this difference, the two methods will occasionally give different rankings of investment alternatives.

• Question 147:

  Suzie owns a computer reselling business and is expanding it. She is presented with two options. Under Proposal A, the estimated investment for the expansion project is $85,000, and it is expected to produce after--tax cash flows of $25,000 for each of the next 6 years. Proposal B involves an investment of $32,000 and after-tax cash flows of $10,000 for each of the next 6 years. Between which two desired rates of return will Suzie be indifferent to either proposal?

  A. 10%andl2%.

  B. 14%andl6%.

  C. 16%andl8%.

  D. 18%and2o%.

  Correct Answer: C

  The desired rate of return at which the two projects will produce the same NPV can be found by calculating the IRR of the difference in cash flows between the two projects. Proposal A requires an additional investment of $53,000 and generates extra cash flows of $15,000 for 6 years. Dividing the incremental investment by the annual cash flows yields a result of 3.533 ($53,000 + $15000). In other words, this is the present value factor necessary to make the cash flows equal the incremental investment. Consulting the present value table for an ordinary annuity for 6 years reveals that 3.533 is somewhere between 16% and 18%.

• Question 148:

  A project requires an initial cash investment at its inception of $10,000, and no other cash outflows are necessary. Cash inflows from the project over its 3-year life are $6,000 at the end of the first year, $5,000 at the end of the second year, and $2,000 at the end of the third year. The future value interest factors for an amount of $1 at the firm's desired rate of return of 8% are

  

  The present value interest factors for an amount of $1 for three periods are as follows:

  

  The modified IRR (MIRR)for the project is closest to A. 8%

  B. 9%

  C. 10%

  D. 12%

  Correct Answer: D

• Question 149:

  The internal rate of return (IRR) is the

  A. Hurdle rate.

  B. Rate of interest for which the net present value is greater than 1.0.

  C. Rate of interest for which the net present value is equal to zero.

  D. Rate of return generated from the operational cash flows.

  Correct Answer: C

  The IRR is the interest rate at which the present value of the expected future cash inflows is equal to the present value of the cash outflows for a project. Thus1 the IRR is the interest rate that will produce a net present value (NPV) equal to zero. The IRR method assumes that the cash flows will be reinvested at the internal rate of return.

• Question 150:

  A weakness of the internal rate of return (IPP) approach for determining the acceptability of investments is that it

  A. Does not consider the time value of money.

  B. Is not a straightforward decision criterion.

  C. Implicitly assumes that the firm is able to reinvest project cash flows at the firm's cost of capital.

  D. Implicitly assumes that the firm is able to reinvest project cash flows at the project's internal rate of return.

  Correct Answer: D

  The IRR is the rate at which the discounted future cash flows equal the net investment (NPV = 0). One disadvantage of the method is that inflows from the early years are assumed to be reinvested at the IRP. This assumption may not be sound. Investments in the future may not earn as high a rate as is currently available.