IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 301:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  Which statement about the internal rate of return of the investment is true?

  A. The IRR is exactly 12%.

  B. The IRR is over 12%.

  C. The IRR is under 12%.

  D. No information about the IRR can be determined.

  Correct Answer: B

• Question 302:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  The profitability index is

  A. .61

  B. .42

  C. .86

  D. 1425

  Correct Answer: D

• Question 303:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  The traditional payback period is

  A. Over5years.

  B. 2.23years.

  C. 1.65years.

  D. 2.83 years.

  Correct Answer: B

  The payback period is the number of years required to complete the return of the original investment. The cash flows are not time adjusted. When the annual cash flows are not uniform, a cumulative computation is necessary. Thus, the total paybackafter2years is $456,000 ($240,000 + $216,000), and another $44,000 ($500,000 -- $456,000) must be recovered in the third year. The third year fraction is found by assuming that cash flows occur evenly throughout the period. Dividing $44,000 by the $192,000 of third year inflows yields a ratio of .23. Hence, the payback period is 2.23 years.

• Question 304:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  The net present value is

  A. $304,060

  B. $212,320

  C. $(70,000)

  D. $712,320

  Correct Answer: B

• Question 305:

  A proposed investment is not expected to have any salvage value at the end of its 5-year life. Because of realistic depreciation practices, the net carrying amount and the salvage value are equal at the end of each year. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return.

  

  The accounting rate of return based on the average investment is

  A. 84.9%

  B. 344%

  C. 40.8%

  D. 12%

  Correct Answer: B

  The accounting rate of return (the unadjusted rate of return or rate of return on the carrying amount) equals the increase in accounting net income divided by either the initial or the average investment. It ignores the time value of money. The average income over 5 years is $86,000 [($70,000 + $78,000 + $86,000 + $94000 + $102,000) + 5] Dividing the $86,000 average net income by the $250,000 average investment ($500,000 cost + 2) produces an accounting rate of return of 34.4%.

• Question 306:

  McLean, Inc. is considering the purchase of a new machine that will cost $160,000. The machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base will be depreciated in the first year1 40% in the second year, and 30% in the third year. The new machine will have a $10000 resale value at the end of its estimated useful life. The machine is expected to save the company $85000 per year in operating expenses. McLean uses a 40% estimated income tax rate and a 16% hurdle rate to evaluate capital projects. Discount rates for a 16% rate are as follows:

  

  The payback period for this investment would be

  A. 1.88years.

  B. 3.00 years.

  C. 2.23years.

  D. 1.62 years.

  Correct Answer: C

  The payback period is the number of years required for the cumulative undiscounted net cash inflows to equal the original investment. The future net cash inflows consist of $69,000 in Year 1 and 3, $75,000 in Year 2, and $10,000 upon resale. After 2 years, the cumulative undiscounted net cash inflow equals $144,000. Thus, $16,000 ($160,000 -- $144,000) is to be recovered in the Year 3, and payback should be complete in approximately 2.23 years [2 years + ($16,000 ?$69,000 net cash inflow in third year)]

• Question 307:

  MS Trucking is considering the purchase of a new piece of equipment that has a net initial investment with a present value of $300,000. The equipment has an estimated useful life of3years. For tax purposes1 the equipment will be fully depreciated a rates of 30%, 40%, and 30% in years one, two, and three, respectively. The new machine is expected to have a $20,000 salvage value. The machine is expected to save the company $170,000 per year in operating expenses. MS Trucking has a 40% marginal income tax rate and a 16% cost of capital. Discount rates for a 16% rate are:

  

  What is the net present value of this project?

  A. $3,278

  B. $5,842

  C. $(568)

  D. $30,910

  Correct Answer: B

• Question 308:

  MS Trucking is considering the purchase of a new piece of equipment that has a net initial investment with a present value of $300,000. The equipment has an estimated useful life of3years. For tax purposes1 the equipment will be fully depreciated a rates of 30%, 40%, and 30% in years one, two, and three, respectively. The new machine is expected to have a $20,000 salvage value. The machine is expected to save the company $170,000 per year in operating expenses. MS Trucking has a 40% marginal income tax rate and a 16% cost of capital. Discount rates for a 16% rate are:

  

  Assume that the salvage value at the end of the investment's useful life is zero. What is the new payback period?

  A. 2.84years.

  B. 1.76years.

  C. 2.08 years.

  D. 2.09 years.

  Correct Answer: D

  The payback period is the time required to recover the original investment. As determined below, the annual net after-tax cash inflows for Years 1 through 3 are $138,000, $150,000, and $138,000 (excluding salvage value), respectively. In Year 1, the after-tax cash inflow is $170,000 minus taxes of $32,000 {[$1 70,000 -- ($300,000 x 30%) depreciation] x 40%}, or $138,000. In Year 2, the after-tax cash inflow is $170,000 minus taxes of $20,000 {[$1 70,000 -- $300,000 x 40%) depreciation] x 40%}, or $150,000. In Year 3, the after-tax cash inflow I(excluding salvage value) is again $138,000. After 2 years, $288,000 ($138,000 + $150,000) will have been `recovered. Consequently, the first $12,000 received in Year 3 will recoup the initial investment. Because $12,000 represents .09 (rounded) of Year 3 net after4ax cash inflows ($12,000 + $138,000), the payback period is 2.09 years.

• Question 309:

  MS Trucking is considering the purchase of a new piece of equipment that has a net initial investment with a present value of $300,000. The equipment has an estimated useful life of3years. For tax purposes1 the equipment will be fully depreciated a rates of 30%, 40%, and 30% in years one, two, and three, respectively. The new machine is expected to have a $20,000 salvage value. The machine is expected to save the company $170,000 per year in operating expenses. MS Trucking has a 40% marginal income tax rate and a 16% cost of capital. Discount rates for a 16% rate are:

  

  The payback period for this investment is

  A. 2.84years.

  B. 1.76years.

  C. 2.O8years.

  D. 3.00 years.

  Correct Answer: C

  The payback period is the time required to recover the original investment. The annual net after-tax cash inflows for Year 1 through Year 3 are $138,000, $150,000, and $150,000, respectively, as determined by the following: In Year I, the after-tax cash inflow is $170,000 minus taxes of $32,000 {[$1 70,000 -($300,000 x 30%) depreciation] x40%}, or $138,000. In Year 2, the after-tax cash inflow is $170,000 minus taxes of $20,000 {[$1 70,000 -- ($300,000 x 40%) depreciation] x 40%}, or $150,000. In Year 3, the after-tax cash inflow (excluding salvage value) is again $138,000. After2years, $288,000 ($138,000 + $150,000) will have been recovered. Consequently, the first $12,000 received in Year 3 will recoup the initial investment. Because $12,000 represents .08 ofYear3 net after-tax cash inflows ($12,000 + $150,000), the payback period is 2.09 years.

• Question 310:

  MS Trucking is considering the purchase of a new piece of equipment that has a net initial investment with a present value of $300,000. The equipment has an estimated useful life of3years. For tax purposes1 the equipment will be fully depreciated a rates of 30%, 40%, and 30% in years one, two, and three, respectively. The new machine is expected to have a $20,000 salvage value. The machine is expected to save the company $170,000 per year in operating expenses. MS Trucking has a 40% marginal income tax rate and a 16% cost of capital. Discount rates for a 16% rate are:

  

  What is the profitability index for the project?

  A. 1.089

  B. 1.106

  C. 1.315

  D. 1.063

  Correct Answer: A

  The profitability index is the present value of the future net cash inflows divided by the present value of the net initial investment. The present value of the future net cash inflows is $326,556. Hence, the profitability index is 1.089 ($326,556 $300,000).