IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 161:

  A firm with an 18% desired rate of return is considering the following projects (on January 1, Year 1):

  

  

  Project B's internal rate of return is closest to

  A. 15%

  B. 16%

  C. 18%

  D. 20%

  Correct Answer: D

  The internal rate of return is the discount rate at which the NPV is zero. Consequently, the cash outflow equals the present value of the inflow at the internal rate of return. The present value of $1 factor for Project B's internal rate of return is therefore 4020 ($4,000,000 cash outflow ?$9,950,000 cash inflow). This factor is closest to the present value of $1 for5 periods at 20%.

• Question 162:

  A firm with an 18% desired rate of return is considering the following projects (on January 1 1Year 1): Using the net-present-value (NPV) method, Project A's net present value is

  

  

  A. $316,920

  B. $23,140

  C. $(265,460)

  D. $(316,920)

  Correct Answer: C

  The cash inflow occurs 5 years after the cash outflow, and the NPV method uses the firm's desired rate of return of 18%. The present value of $1 due at the end of 5 years discounted at 18% is .4371. Thus, the NPV of Project A is $(265,460) [($7,400,000 cash inflow x 4371) --$3,500,000 cash outflow].

• Question 163:

  The rankings of mutually exclusive investments determined using the internal rate of return method (IRR) and the net present value method (NPV) may be different when

  A. The lives of the multiple projects are equal and the size of the required investments is equal.

  B. The required rate of return equals the IRR of each project.

  C. The required rate of return is higher than the IRR of each project.

  D. Multiple projects have unequal lives and the size of the investment for each project is different.

  Correct Answer: D

  The two methods ordinarily yield the same results, but differences can occur when the duration of the projects and the initial investments differ. The reason is that the IRR method assumes cash inflows from the early years will be reinvested at the internal rate of return. The NPV method assumes that early cash inflows are reinvested at the NPV discount rate.

• Question 164:

  The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the

  A. Computed internal rate of return.

  B. Risk4ree interest rate.

  C. Discount rate used in the NPV calculation.

  D. Firm's accounting rate of return.

  Correct Answer: C

  The NPV method is used when the discount rate is specified. It assumes that cash flows from the investment can be reinvested at the particular project's discount rate.

• Question 165:

  The following data pertain to a 4-year project being considered by Metro Industries:

  A depreciable asset that costs $1 .200.000 will be acquired on January 1. The asset, which is expected to

  have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property under the Modified

  Accelerated Cost Recovery System (MACPS).

  The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same

  January 1 for $180,000.

  The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating

  costs are: variable, $12 per unit fixed, $90,000 per year.

  A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required.

  Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that

  any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the

  net present value method to analyze investments and will employ the following factors and rates.

  

  4. The overall discounted-cash-flow impact of the working capital investment on Metro's project is

  A. $(2,800)

  B. $(18,000)

  C. $(50,000)

  D. $(59,200)

  Correct Answer: B

  The working capital investment is treated as a $50,000 outflow at the beginning of the project and a $50,000 inflow at the end of 4 years. Accordingly, the present value of the inflow after 4 years should be subtracted from the initial $50,000 outlay. The overall discounted-cash4low impact of the working capital investment is $18,000 [$50,000-- ($50,000 x .64 PV of $1 at 12% forfour periods)].

• Question 166:

  The following data pertain to a 4-year project being considered by Metro Industries:

  A depreciable asset that costs $1,200,000 will be acquired on January 1 . The asset, which is expected to

  have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property under the Modified

  Accelerated Cost Recovery System (MACPS).

  The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same

  January 1 for $180,000.

  The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating

  costs are: variable, $12 per unit fixed, $90,000 per year.

  A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required.

  Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that

  any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the

  net present value method to analyze investments and will employ the following factors and rates.

  

  The expected incremental sales will provide a discounted, net-of-tax contribution margin over 4 years of

  A. $57,600

  B. $92,160

  C. $273,600

  D. $437,760

  Correct Answer: D

  Additional annual sales are 30,000 units at $20 per unit. If variable costs are expected to be $12 per unit, the unit contribution margin is $8, and the total before-tax annual contribution margin is $240,000 (30,000 units x $8). The after-tax total annual contribution margin is $144,000 [$240,000 x (1 .0-- 4)]. This annual increase in the contribution margin should be treated as an annuity. Thus, its present value is $437,760 ($144,000 x 3.04 PV of an annuity of $1 at 12% for four periods).

• Question 167:

  The following data pertain to a 4-year project being considered by Metro Industries:

  A depreciable asset that costs $1 .200.000 will be acquired on January 1. The asset, which is expected to

  have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property under the Modified

  Accelerated Cost Recovery System (MACPS).

  The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same

  January 1 for $180,000.

  The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating

  costs are: variable, $12 per unit fixed, $90,000 per year.

  A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required.

  Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that

  any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the

  net present value method to analwe investments and will employ the following factors and rates.

  

  The discounted, net-of-tax amount that relates to disposal of the existing asset is

  A. $168,000

  B. $169,320

  C. $180,000

  D. $190,680

  Correct Answer: B

  The cash in flow from the existing asset is $180,000, but that amount is subject to tax on the $30,000 gain ($180,000-- $150,000 tax basis). The tax on the gain is $12,000 ($30,000 x 40%). Because the tax will not be paid until year-end1 the discounted value is $10,680 ($12,000 x .89 PV of $1 at 12% for one period). Thus, the net-of-tax inflow is $169,320 ($180,000--$10,680). NOTE: This as set was probably a Section 1231 asset, and any gain on sale qualifies for the special capital gain tax rates. Had the problem not stipulated a 40% tax rate, the capital gains rate would be used. An answer based on that rate is not among the options.

• Question 168:

  The following data pertain to a 4-year project being considered by Metro Industries: ?A depreciable as set that costs $1, 200,000 will be acquired on January 1 . The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property' under the Modified Accelerated Cost Recovery System (MACPS). The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000. The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit fixed, $90,000 per year. A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required. Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates.

  

  The discounted cash flow for the fourth year MACPS depreciation on the new asset is

  A. $0

  B. $17,920

  C. $21,504

  D. $26,880

  Correct Answer: C

  Tax law allows taxpayers to ignore salvage value when calculating depreciation under MACPS. Thus1 the depreciation deduction is 7% of the initial $1 .200000 cost, or $84,000. Ata4O% tax rate, the deduction will save the company $33,600 in taxes in the fourth year. The present value of this savings is $21,504 ($33,600 x 0.64 present value of $1 at 12% for four periods).

• Question 169:

  McCann Company can manufacture one of two special orders with their existing capacity. Special Order A

  is for 100,000 units and Special Order B is for 200,000 units.

  Cost and revenue data per unit are as follows:

  

  Based on the above information, which one of the following statements correctly identifies the effect on pretax profit if the optimal decision is made?

  A. $200 increase if Special Order A is taken.

  B. $9,200 increase if Special Order A is taken.

  C. $13,430 increase if Special Order A is taken.

  D. $8,040 increase if Special Order B is taken.

  Correct Answer: B

• Question 170:

  Following are the operating results of the two segments of Parklin Corporation.

  

  Fixed costs of goods sold are allocated to each segment based on the number of employees. Fixed selling and administrative expenses are allocated equally. If Segment B is eliminated, $1 .500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed, the effect on operating income would be a(n)

  A. Increase of $500.

  B. Increase of $2,000.

  C. Decrease of $2,000.

  D. Decrease of $2500.

  Correct Answer: C