IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 331:

  Mercken Industries is contemplating four projects, Project P, Project Q, Project P, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%.

  

  If Mercken is able to accept only one project, the company would choose

  A. Project P.

  B. Project 0 because it has the highest net present value.

  C. Project P because it has the highest internal rate of return.

  D. Project P because it has the shortest payback period.

  Correct Answer: B

  Because unused funds cannot be invested at a rate greater than 12%, the company should select the investment with the highest net present value. Project Q is preferable to P because its return on the incremental $45000 invested ($235,000 cost of Q--$190,000 cost of P) is greater than 12%.

• Question 332:

  Mercken Industries is contemplating four projects, Project P, Project Q, Project P, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%.

  

  During this year, Mercken will choose

  A. Projects P, 0, and P.

  B. Projects P, Q, R, and S.

  C. Projects Q and R.

  D. Projects P and Q.

  Correct Answer: C

  Only two of the projects can be selected because three would require more than $450,000 of capital. Project S can immediately be dismissed because it has a negative net present value (NPV). Using the NPV and the profitability index methods, the best investments appear to be 0 and P. The internal rate of return (IPP) method indicates that P is preferable to P. However, it assumes reinvestment of funds during Years 4 and 5 at the lRR (18.7%). Given that reinvestment will be at a rate of at most 12%, the IPP decision criterion appears to be unsound in this situation.

• Question 333:

  Maloney Company 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 Maloney undertake during the upcoming year if it has only $6,000,000 of funds available?

  A. Project 3.

  B. Projects 1 and 2.

  C. Project 1.

  D. Project 2.

  Correct Answer: C

  With only $6,000,000 available and each project costing $4,000,000 or more, no more than one project can be undertaken. Project 1 should be chosen because it has a positive NPV and the highest profitability index. The high profitability index means that the company will achieve the highest NPV per dollar of investment with Project 1.The profitability index facilitates comparison of different-sized investments.

• Question 334:

  Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year Which projects should Maloney undertake during the upcoming year if it has only $12,000,000 of investment funds available?

  

  A. Projects 1 and 3.

  B. Projects 1, 2, and 4.

  C. Projects 1 and 4.

  D. Projects 1 and 2.

  Correct Answer: D

  With only $12,000,000 available and each project costing $4,000,000 or more, no more than two projects can be undertaken. Accordingly, projects should be selected because they have the greatest NPVs and profitability lily indexes.

• Question 335:

  Maloney Company 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 Maloney undertake during the upcoming year assuming it has no budget restrictions?

  A. All of the projects.

  B. Projects 1, 2 and 3.

  C. Projects 1, 2 and 4.

  D. Projects 1 and 2.

  Correct Answer: C

  A company using the net present value (NPV) method should undertake all projects with positive NPVs that are not mutually exclusive. Given that Projects 1, 2, and 4 have positive NPVs, those projects should be undertaken. Furthermore, a company using the internal rate of return (IRR) as a decision rule ordinarily chooses projects with a return greater than the cost of capital. Given a 12% cost of capital. Projects 1, 2, and 4 should be chosen using an IRR criterion if they are not mutually exclusive. Use of the profitability index yields a similar decision because a project with an index greater than 100% should be undertaken.

• Question 336:

  Which mutually exclusive project would you select if both are priced at $1,000 and your discount rate is 14%: Project A, with three annual cash flows of $1 .000, Project B, with three years of zero cash flow followed by three years of $1,500 annually?

  A. Project A.

  B. Project B.

  C. The IRRs are equal, hence you are indifferent.

  D. The NPVs are equal, hence you are indifferent.

  Correct Answer: B

• Question 337:

  Which one of the following capital investment evaluation methods does not take the time value of money into consideration?

  A. Net present value.

  B. Discounted payback.

  C. Internal rate of return.

  D. Accounting rate of return.

  Correct Answer: D

  The accounting rate of return (unadjusted rate of return or rate of return on the carrying amount) equals accounting net income divided by the required initial or average investment. The accounting rate of return ignores the time value of money.

• Question 338:

  If income tax considerations are ignored, how is depreciation handled by the following capital budgeting techniques?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer:

  If taxes are ignored, depreciation is not a consideration in any of the methods based on cash flows because it is a non-cash expense. Thus, the internal rate of return, net present value, and payback methods would not consider depreciation because these methods are based on cash flows. However, the accounting rate of return is based on net income as calculated on an income statement. Because depreciation is included in the determination of accrual accounting net income, it would affect the calculation of the accounting rate of return.

• Question 339:

  The method that divides a project's annual after--tax net income by the average investment cost to measure the estimated performance of a capital investment is the

  A. Internal rate of return method.

  B. Accounting rate of return method.

  C. Payback method.

  D. Net present value (NPV) method.

  Correct Answer: B

  The accounting rate of return uses undiscounted net income (not cash flows) to determine a rate of profitability. Annual after-tax net income is divided by the average carrying amount (or the initial value) of the investment in assets.

• Question 340:

  The technique used to evaluate all possible capital projects of different dollar amounts and then rank them according to their desirability is the

  A. Profitability index method.

  B. Net present value method.

  C. Payback method.

  D. Discounted cash flow method.

  Correct Answer: A

  The profitability index is the ratio of the present value of future net cash inflows to the initial cash investment; that is, the figures are those used to calculate the net present value (NPV), but the numbers are divided rather than subtracted. This variation of the NPV method facilitates comparison of different-sized investments. It provides an optimal ranking in the absence of capital rationing.