IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 21:

  Calamity Cauliflower Corporation is conceding undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years At the end of that time, the new equipment, witch will be depreciated on a straight-line basis, is expected to have a sage value of $10,000. The exiting equipment that would be sold to make room for the project has a historical cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. The net initial investment required for Calamity Cauliflower to undertake this capital project is

  A. $184,000

  B. $176,000

  C. $174,400

  D. $160,000

  Correct Answer: C

  The net initial investment consists of the initial outlay for new equipment ($160,000) plus the increase to working capital ($24,000) minus the net after-tax cash flow from the disposal of the old equipment ($9,600).

• Question 22:

  Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. The total after-tax cash inflow relevant to Calamity Cauliflower's disposal of the old equipment is

  A. $9,600

  B. $8,000

  C. $6,400

  D. $1,600

  Correct Answer: A

  The relevant after-tax cash inflow consists of the proceeds on the disposal ($8.000) plus the tax benefit ($1,600).

• Question 23:

  Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, witch will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's tax benefit arising from the disposal of the old equipment is

  A. $8,000

  B. $4,800

  C. $3,200

  D. $1,600

  Correct Answer: D

• Question 24:

  Post-investment audits?

  A. Complete a stage in the capital budgeting process.

  B. Sieve as a control mechanism.

  C. Allow the outcome of a project to be evaluated as soon as possible

  D. Deter managers from proposing profitable investments

  Correct Answer: B

  Post-investment audits should be conducted to serve as a control mechanism and to deter managers from proposing unprofitable investments. Actual-to-expected cash flow comparisons should be made, and unfavorable variances should be explained. Individuals who supplied unrealistic estimates should have to explain Differences.

• Question 25:

  The maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative is called?

  A. Opportunity cost.

  B. Sunk cost.

  C. Incremental cash flow.

  D. Net initial investment.

  Correct Answer: A

  An opportunity cost is the maximum benefit forgone by using a scarce resource for a given purpose and not for the next-best alternative. In capital budgeting, the most basic application of this concept is the desire to place the company's limited funds in the most promising capital project(s).

• Question 26:

  Book rate of return is an unsatisfactory guide to selecting capital projects because

  I. It uses accrual accounting numbers

  II. It compares a single project against the average of capital rejects.

  III.

  It uses cash flows to gauge the desirability of the project.

  A.

  l only.

  B.

  l and ll.

  C.

  Ill only.

  D.

  I. II, and Ill.

  Correct Answer: B

  A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the compas choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number `may be a hand Full of good projects melding up for a large number of poor investments.

• Question 27:

  The capital budgeting process contains several stages. At which stage are financial and no financial factors addressed?

  A. Identification and definition

  B. Selection.

  C. Search.

  D. Information-acquisition

  Correct Answer: D

  During the information-acquisition stage of the capital budgeting process, quantitative financial factors are given the most scrutiny. These include initial investment and periodic cash inflow. Non financial measures, both quantitative and qualitative, are also Edentate and addressed. Examples include the need for additional training on new equipment and uncertainty about technological developments and competitors' actions.

• Question 28:

  Which of the following is not a category of relevant cash flows'?

  A. Annual net cash flows

  B. Project termination cash flows.

  C. Incremental cash flows.

  D. Net initial investment.

  Correct Answer: C

  Relevant cash flows are a much more reliable guide when judging capital projects, since only they provide a true measure of a project's potential to affect shareholder value. The relevant cash flows can be divided into three categories. (1) net initial investment, (2) annual net cash flows, and (3) project termination cash flows. An incremental cash flow is the difference in cash received or disbursed resulting from selecting one option instead of another. It is not a category of relevant cash Bows.

• Question 29:

  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-tern, 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 deacons tend to be relatively inflexible.

• Question 30:

  The accounting rate of return?

  A. Is sonorous with the internal rate of return.

  B. Focuses on income as opposed to cash flows.

  C. Is inconsistent with the divisional performance measure known as return on investment.

  D. Recognizes the time value of money.

  Correct Answer: B

  The accounting rate of return (also called the unadjusted rate of return or book value rate of return) is calculated by dividing the increase in accounting net income by the required investment. Sometimes the denominator is the average investment rather than the initial irstment This method ignores the time value of money hand focuses on income as opposed to cash flows.