IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 311:

  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. $31684

  B. $26,556 C. $94,640

  D. $18,864

  Correct Answer: B

• Question 312:

  Woods, Inc. is considering four independent investment proposals. Woods has $3 million available for investment during the present period. The investment outlay for each project and its projected net present value (NPV) is presented below.

  

  Which of the following project options should be recommended to Woods' management?

  A. Projects I, II, and Ill only.

  B. Projects I, II, and IV only.

  C. Projects II, Ill, and IV only.

  D. Projects Ill and IV only.

  Correct Answer: A

• Question 313:

  Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method?

  A. Net present value.

  B. Time-adjusted rate of return.

  C. Profitability index.

  D. Accounting rate of return.

  Correct Answer: C

  The profitability index is the ratio of the present value of future net cash inflows to the initial cash investment. This variation of the net present value method facilitates comparison of different-sized investments. Were it not for this comparison feature. the profitability index would be no better than the net present value method. Thus. It is the comparison, or ranking, advantage that makes the profitability index different from the other capital budgeting tools

• Question 314:

  The technique that measures the number of years required for the after-tax cash flows to recover the initial investment in a project is called the

  A. Net present value method.

  B. Payback method.

  C. Profitability index method.

  D. Accounting rate of return method.

  Correct Answer: B

  The usual payback formula divides the initial investment by the constant net annual cash The payback method is unsophisticated in that it ignores the time value of money, but it is widely used because of its simplicity and emphasis on recovery of the initial investment.

• Question 315:

  The technique that measures the estimated performance of a capital investment by dividing the project's annual after4ax net income by the average investment cost is called the

  A. Average rate of return method.

  B. Internal rate of return method.

  C. Capital asset pricing model.

  D. Accounting rate of return method.

  Correct Answer: D

  The accounting rate of return is calculated by dividing the annual after-tax net income from a project by the book value of the investment in that project. The time value of money is ignored.

• Question 316:

  The technique that incorporates the time value of money by determining the compound interest rate of an investment such that the present value of the after-tax cash inflows over the life of the investment is equal to the initial investment is called the

  A. Internal rate of return method.

  B. Capital asset pricing model.

  C. Profitability index method.

  D. Accounting rate of return method.

  Correct Answer: A

  The internal rate of return (IRR) is the discount rate at which the present value of the cash inflows equals the present values of the cash outflows (including the original investment). Thus, the NPV of the project is zero at the IRR. The IRR is also the maximum borrowing cost the firm can afford to pay for a specific project. The IRR is similar to the yield rate/effective rate quoted in the business media.

• Question 317:

  The technique that reflects the time value of money and is calculated by dividing the present value of the future net after- tax cash inflows that have been discounted at the desired cost of capital by the initial cash outlay for the investment is called the

  A. Capital rationing method.

  B. Average rate of return method.

  C. Profitabilityr index method.

  D. Accounting rate of return method.

  Correct Answer: C

  The profitability index is another term for the excess present value index. It measures the ratio of the present value of future net cash inflows to the original investment. In organizations with unlimited capital funds, this index will produce no conflicts in the decision process. If capital rationing is necessary, the index will be an insufficient determinant. The capital available as well as the dollar amount of the net present value must both be considered.

• Question 318:

  The technique that recognizes the time value of money by discounting the after-tax cash flows for a project over its life to time period zero using the company's minimum desired rate of return is called the

  A. Net present value method.

  B. Payback method.

  C. Average rate of return method.

  D. Accounting rate of return method.

  Correct Answer: A

  The net present value method discounts future cash flows to the present value using some arbitrary rate of return, which is presumably the firm's cost of capital. The initial cost of the project is then deducted from the present value. If the present value of the future cash flows exceeds the cost, the investment is considered to be acceptable.

• Question 319:

  Future1 Inc. is in the enviable situation of having unlimited capital funds. The best decision rule, in an economic sense, for it to follow would be to invest in all projects in which the

  A. Accounting rate of return is greater than the earnings as a percent of sales.

  B. Payback reciprocal is greater than the internal rate of return.

  C. Internal rate of return is greater than zero.

  D. Net present value is greater than zero.

  Correct Answer: D

  Given unlimited funds1 all projects with a net present value greater than zero should be invested in. Thus, it would be profitable to invest in any company where the rate of return is greater than the cost of capital.

• Question 320:

  A company has unlimited capital funds to invest. The decision rule for the company to follow in order to maximize shareholders' wealth is to invest in all projects having a(n)

  A. Present value greater than zero.

  B. Net present value greater than zero.

  C. Internal rate of return greater than zero.

  D. Accounting rate of return greater than the hurdle rate used in capital budgeting analyses.

  Correct Answer: B

  If the net present value (NPV) of an investment is positive, the project should be accepted (unless projects are mutually exclusive). If the NPV is negative, the investment should be rejected.