IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 321:

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

  A. Bail-out payback method.

  B. Internal rate of return method.

  C. Profitability index method.

  D. Accounting rate of return method.

  Correct Answer: D

  The accounting rate of return (also called the unadjusted rate of return or book value rate return) measures investment performance by dividing the accounting net income by the average investment in the project. This method ignores the time value of money.

• Question 322:

  The recommended technique for evaluating projects when capital is rationed and there are no mutually exclusive projects from which to choose is to rank the projects by

  A. Accounting rate of return.

  B. Payback.

  C. Internal rate of return.

  D. Profitability index.

  Correct Answer: D

  The profitability index (P1) is often used to decide among investment alternatives when more than one is acceptable. The profitability' index is the ratio of the present value of future net cash inflows to the initial net cash investment. The P1, although a variation of the net present value method, facilitates comparison of different-sized investments.

• Question 323:

  Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

  

  Which project(s) should Capital Invest, Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?

  A. Project 1.

  B. Projects 2, 3, and 4.

  C. Projects 3 and 4.

  D. Project 3.

  Correct Answer: D

  Given that $300,000 is available and that each project costs $200,000 or more, only one project can be undertaken. Because Project 3 has a positive NPV and the highest profitability index, it is the best investment. The high profitability index means that the company will achieve the highest NPV per dollar of investment with Project 3. The profitability index facilitates comparison of different-sized investments.

• Question 324:

  Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

  

  Which project(s) should Capital Invest, Inc. undertake during the upcoming year if it has only $600,000 of funds available?

  A. Projects 1 and 3.

  B. Projects 2, 3, and 4.

  C. Projects 2 and 3.

  D. Projects 3 and 4.

  Correct Answer: D

  Given that only $600,000 is available and that each project costs $200,000 or more, no more than two projects can be undertaken. Because Projects 3 and 4 have the greatest NPVs, profitability indexes, and IRRs, they are the projects in which the company should invest.

• Question 325:

  Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:

  

  Which project(s) should Capital Invest, Inc. undertake during the upcoming year assuming it has no budget restrictions?

  A. All of the projects.

  B. Projects 1, 2, and 3.

  C. Projects 2, 3,and 4.

  D. Projects 1, 3, and 4.

  Correct Answer: C

  A company using the NPV method should undertake all projects with a positive NPV, unless some of those projects are mutually exclusive. Given that Projects 2, 3, and 4 have positive NPVs, they should be undertaken. Project 1 has a negative NPV.

• Question 326:

  Flex Corporation is studying a capital acquisition proposal in which newly acquired assets will be depreciated using the straight-line method. Which one of the following statements about the proposal would be incorrect if a switch is made to the Modified Accelerated Cost Recovery System (MACRS)?

  A. The net present value will increase.

  B. The internal rate of return will increase.

  C. The payback period will be shortened.

  D. The profitability index will decrease.

  Correct Answer: D

  MACPS is an accelerated method of depreciation under which depreciation expense will be greater during the early years of an asset's life. Thus, the outflows for income taxes will be less in the early years, but greater in the later years1 and the NPV (present value of net cash inflows -- investment) will be increased. The profitability index (present value of net cash inflows ?the investment) must increase if the NPV increases.

• Question 327:

  Mesa Company is considering an investment to open a new banana processing division. The project in question would entail an initial investment of $45000, and as a result of the project cash inflows of $20000 can be expected in each of the next 3 years. The hurdle rate is 10%. What is the profitability index for the project?

  A. 1.0784

  B. 1.1053

  C. 1.1379

  D. 1.1771

  Correct Answer: B

• Question 328:

  Mulva Inc. is considering the following five independent projects: The company has a target capital structure which is 40 percent debt and 60 percent equity. The company can issue bonds with a yield to maturity of 10 percent. The company has $900000 in retained earnings, and the current stock price is $40 per share. The flotation costs associated with issuing new equity are $2 per share. Mulva's earnings are expected to continue to grow at 5 percent per year. Next year's dividend (D1) is forecasted to be $2.50. The firm faces a 40 percent tax rate. What is the size of Mulva's capital budget?

  

  A. $1,200,000

  B. $1,750,000

  C. $2,400,000

  D. $800,000

  Correct Answer: B

• Question 329:

  Rohan Transport is considering two alternative busses to transport people between cities that are in the Southeastern U.S., such as Baton Rouge and Gainesville. A gas-powered bus has a cost of $55,000, and will produce end-of-year net cash flows of $22,000 per year for 4 years. A new electric bus will cost $90,000, and will produce cash flows of $28000 per year for 8 years. The company must provide bus service for 8 years, after which it plans to give up its franchise and to cease operating the route. Inflation is not expected to affect either costs or revenues during the next 8 years. If Rohan Transports cost of capital is 16%, by what amount will the better project increase the company's value?

  A. $6,556

  B. $(14,432)

  C. $13,112

  D. $31,632

  Correct Answer: D

• Question 330:

  The method that recognizes the time value of money by discounting the after-tax cash flows over the life of a project, using the company's minimum desired rate of return is the

  A. Accounting rate of return method.

  B. Net present value method.

  C. Internal rate of return method.

  D. Payback method.

  Correct Answer: B

  The net present value (NPV) method computes the discounted present value of future cash inflows to determine whether they are greater than the initial cash outflow. The discount rate (cost of capital or hurdle rate) must be known to discount the future cash inflows. If the NPV is positive (present value of future cash inflows exceeds initial cash outflow), the project should be accepted. If the NPV is negative, the project should be rejected.