IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 291:

  Don Adams Breweries is considering an expansion project with an investment of $1,500,000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the book (accounting) rate of return of the investment using the average investment method?

  A. 6.67%

  B. 13.33%

  C. 16.67%

  D. 26.67%

  Correct Answer: B

• Question 292:

  Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes.What is the NPV of the investment?

  A. $0

  B. $(58,000)

  C. $(116,000)

  D. $1,442,000

  Correct Answer: B

• Question 293:

  Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes.What is the SR of the investment?

  A. 1043%

  B. 12.68%

  C. 16.32%

  D. 19.17%

  Correct Answer: A

• Question 294:

  Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes.What is the NPV for the investment?

  A. $172,800

  B. $(1,913,600)

  C. $520,000

  D. $362,400

  Correct Answer: A

  The NPV is the difference between the present value of the estimated net cash inflows and the present value of the net cash outflows. The present value of the net cash inflows discounted at 14% is $4,172,800 [$800,000(5.216)]. Therefore, the NPV of the investment is $172,800 ($4,172,800 --$4,000,000).

• Question 295:

  Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes.What is the discounted payback period for the investment?

  A. 5.5years.

  B. 7.1 years.

  C. 9.2 years.

  D. 11.7years.

  Correct Answer: C

  The discounted payback period is the number of years needed to get the PV of the cash flows to equal the initial investment. At a 14% discount rate, this occurs at 9.2 years. The discounted payback period was calculated by dividing the initial investment of $4.000000 by the annual cash flow of $800000 giving a

  5.000 Present Value of Annuity Factor at 14%, which equals approximately 9.2 years.

• Question 296:

  Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes.What is the book (or accounting) rate of return for the investment using the average investment method?

  A. 10%

  B. 20%

  C. 28%

  D. 35%

  Correct Answer: B

• Question 297:

  Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.

  

  The traditional payback period for the investment proposal is

  A. .875 years.

  B. 1.833 years.

  C. 2.250 years.

  D. Over5years.

  Correct Answer: C

  The payback period is the time required to recover the initial investment. The net cash inflows used to determine the payback period are not discounted. The initial cost was $105,000, and inflows during the first 2 years were $95,000 ($50,000 + $45,000). Thus, the first $10,000 ($105,000 -- $95,000) of the third year's net cash inflows will complete the recovery' of the initial investment. This amount is one1ourth of the third year's inflows. Hence, the payback period is 2.25 years.

• Question 298:

  Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.

  

  The net present value of the investment proposal is

  A. $4,600

  B. $10,450

  C. $(55,280)

  D. $115,450

  Correct Answer: B

• Question 299:

  Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investments life.

  

  Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.

  

  The accounting rate of return for the investment proposal over its life using the initial value of the investment is

  A. 36.2%

  B. 18.1%

  C. 28.1%

  D. 38.1%

  Correct Answer: B

  The accounting rate of return (or unadjusted rate of return) is computed by dividing the annual increase in accounting net income by the required investment. The average net income over the life of the investment is $19,000 [($15,000 + $17,000 + $19,000 + $21,000 + $23,000) 5 years]. Conse-quently, the accounting rate of return is 18.1% ($19,000 + $105,000).

• Question 300:

  Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the end of each year is equal to its net book value, and there will be no salvage value at the end of the investments life.

  

  Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.

  

  The average annual cash inflow at which Yipann would be indifferent to the investment (rounded to the nearest dollar) is

  A. $21,000

  B. $40,000

  C. $38,321

  D. $46,667

  Correct Answer: C

  This problem requires the use of the net present value (NPV) method of investment analysis. The objective is to determine what average annual net cash inflow will equal the initial cost when discounted at a rate of 24%. Given that the investment has an expected life of5years, the appropriate time value of money factor is that for the present value of an ordinarjannuityfor5years at 24%. In this case, the annual net cash inflow is unknown, but the product of the factor (2.74) and the inflow is $105,000. Thus, dividing $105000 by 2.74 results in an average annual net cash inflow of $38,321. In other words, if annual inflows are $38,321 per year, the present value is $105,000. This present value is equal to the initial cost, and the net present value is zero. Ata net present value of zero, the investor is indifferent as to whether to undertake the investment.