IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 261:

  What is a challenge that the long-term aspect of capital budgeting presents to the management accountant?

  A. Activity can be tracked for a single accounting period.

  B. Capital projects affect multiple accounting periods.

  C. The flexibility of the capital budgeting decision.

  D. Freedom of the organization's financial planning.

  Correct Answer: B

  Capital budgeting is the process of planning and controlling investments for long-term projects. It is this long-term aspect of capital budgeting that presents the management accountant with specific challenges. Most financial and management accounting topics concern tracking and reporting activity for a single accounting or reporting cycle, such as one month or one year. By their nature, capital projects affect multiple accounting periods and will constrain the organization's financial planning well into the future. Once made, capital budgeting decisions tend to be relatively inflexible.

• Question 262:

  A depreciation tax shield is

  A. An after-tax cash outflow.

  B. A reduction in income taxes.

  C. The cash provided by recording depreciation.

  D. The expense caused by depreciation.

  Correct Answer: B

  A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income.

• Question 263:

  Which one of the following statements concerning cash flow determination for capital budgeting purposes is not correct?

  A. Tax depreciation must be considered because it affects cash payments for taxes.

  B. Book depreciation is relevant because it affects net income.

  C. Sunk costs are not incremental flows and should not be included.

  D. Networking capital changes should be included in cash flow forecasts.

  Correct Answer: B

  Tax depreciation is relevant to cash flow analysis because it affects the amount of income taxes that must be paid. However, book depreciation is not relevant because it does not affect the amount of cash generated by an investment.

• Question 264:

  The term that refers to costs incurred in the past that are not relevant to a future decision is

  A. Discretionary cost.

  B. Pull absorption cost.

  C. Under allocated indirect cost.

  D. Sunk cost.

  Correct Answer: D

  A sunk cost cannot be avoided because it represents an expenditure that has already been made or an irrevocable decision to incur the cost.

• Question 265:

  In equipment-replacement decisions1 which one of the following does not affect the decision-making process?

  A. Current disposal price of the old equipment.

  B. Operating costs of the old equipment.

  C. Original fair market value of the old equipment.

  D. Cost of the new equipment.

  Correct Answer: C

  All relevant costs should be considered when evaluating an equipment-replacement decision. These include the cost of the new equipment1 the disposal price of the old equipment, and the operating costs of the old equipment versus the operating costs of the new equipment. The original cost or fair market value of the old equipment is a sunk cost and is irrelevant to future decisions.

• Question 266:

  Of the following decisions, capital budgeting techniques would least likely be used in evaluating the

  A. Acquisition of new aircraft by a cargo company.

  B. Design and implementation of a major advertising program.

  C. Trade for a star quarterback by a football team.

  D. Adoption of a new method of allocating nontraceable costs to product lines.

  Correct Answer: D

  Capital budgeting is the process of planning expenditures for investments on which the returns are expected to occur over a period of more than 1 year. Thus, capital budgeting concerns the acquisition or disposal of long-term assets and the financing ramifications of such decisions. The adoption of a new method of allocating nontraceable costs to product lines has no effect on a company's cash flows, does not concern the acquisition of long- term assets, and is not concerned with financing. Hence, capital budgeting is irrelevant to such a decision.

• Question 267:

  The relevance of a particular cost to a decision is determined by

  A. Riskiness of the decision.

  B. Number of decision variables.

  C. Amount of the cost.

  D. Potential effect on the decision.

  Correct Answer: D

  Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant costs are those expected future costs that vary with the action taken. All other costs are constant and therefore have no effect on the decision.

• Question 268:

  Which of the following is not an example of a real option in a capital budgeting decision?

  A. Abandonment.

  B. Follow-up investment.

  C. Option to wait and learn.

  D. Risk-adjusted discount rates.

  Correct Answer: D

  Real options include such factors as the ability to abandon the project early. the opportunity for follow-up investments or ability' to create new products, the ability' to base additional cash outflows on a wait-andlearn opportunity', or the option to change capacity' during the project. Risk-adjusted discount rates are not real options but are a form of sensitivity' analysis.

• Question 269:

  A company is evaluating the possible introduction of a new version of an existing product that will have a 2year life cycle. At the end of 2 years, this version will be obsolete, with no additional cash flows or salvage value. The initial and sole outlay for the modified product is $6 million, and the company's desired rate of return is 10%. Following are the potential cash flows (assumed to occur at the end of each year) and their probabilities if the product is marketed:

  

  The following interest factors for the present value of $1 at 10% are relevant: Period 1 .909

  2 .826

  Assume the company has the real option to abandon the project at the end of Year 1. If the salvage value at that time is $3 million and the desired rate of return remains at 10%, what is the project's net present value?

  A. $878,050

  B. $1,200,550

  C. $2,746,450

  D. $4,454,100

  Correct Answer: B

• Question 270:

  A company is evaluating the possible introduction of a new version of an existing product that will have a 2year life cycle. At the end of 2 years, this version will be obsolete, with no additional cash flows or salvage value. The initial and sole outlay for the modified product is $6 million, and the company's desired rate of return is 10%. Following are the potential cash flows (assumed to occur at the end of each year) and their probabilities if the product is marketed: The following interest factors for the present value of $1 at 10% are relevant: Period 1 .909

  

  2 .826 The project's net present value is

  A.

  $878,050

  B.

  $3,242,050

  C.

  $3,636,000

  D.

  $6,000,000

  Correct Answer: A