IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 381:

  A firm has daily cash receipts of $200,000. A commercial bank has offered to reduce the collection time by 3 days. The bank requires a monthly fee of $4,000 for providing this service. If money market rates will average 12% during the year, the additional annual income (loss) of having the service is

  A. $(24,000).
  B. $24,000.
  C. $66,240.
  D. $68,000.
  B. $24,000.

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  Explanation

  Since collect ones will be expedited by three days at the rate of $200,000 per day, the company will have an additional $600,000 to invest. At 12%, the interest earned would be $72,000 per year. However, the bank will charge $48,000 (12 months x $4,000 per month) for its services. Thus, the firm will increase its income by $24,000 ($72,000 -- $48,000).

• Question 382:

  Essex Corporation is evaluating a lease that takes effect on March 1. The company must make eight equal payments, with the first payment due on March 1. The concept most relevant to the evaluation of the lease is the

  A. Present value of an annuity due.
  B. Present value of an ordinary annuity
  C. Future value of an annuity due.
  D. Future value of an ordinary annuity.
  A. Present value of an annuity due.

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  Explanation

  An annuity is a series of cash flows or other economic benefits occurring at fixed intervals, ordinarily as a result of an investment, Present value is the value at a specified time of an amount or amounts to be paid or received later, discounted at some interest rate. In an annuity due, the payments occur at the beginning, rather than at the end, of the periods. Thus, the present value of an annuity due includes the initial payment at its undiscounted amount. Evaluation of an investment decision. e.g.. a lease, that involves multi-period cash payments (an annuity) requires an adjustment for the time value of money. Because of the interest factor, a dollar today is worth more than a dollar in the future. Consequently, comparison of different investments requires restating their future benefits and costs in terms of present values. This lease should therefore be evaluated using the present value of an annuity due.

• Question 383:

  Which of the following statement is false with respect to best practices analysis?

  A. The balanced scorecard facilitates best practice analysis.
  B. Best practice analysis is a way or method of accomplishing a business function or process that is considered to be superior to all other known methods.
  C. Best practice analysis assumes that a lesson learned from one area of a business can be passed on to other area of the business or between businesses.
  D. The concept of benchmarking is incompatible with best practice analysis.
  D. The concept of benchmarking is incompatible with best practice analysis.

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  Explanation

  Best practice analysis is a method of accomplishing a business function or process that is considered to be superior to all other known methods. The balanced scorecard facilitated best practice analysis. A lesson learned from one area of a business can be passed on to another area of the business or between businesses. The whole concept of benchmarking is aimed at identifying best practices.

• Question 384:

  A firm with an 18% desired rate of return is considering the following projects (on January 1 1Year 1):

  

  

  Using the net-present-value (NPV) method, Project A's net present value is

  A. $316,920
  B. $23,140
  C. $(265,460)
  D. $(316,920)
  C. $(265,460)

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  Explanation

  The cash inflow occurs 5 years after the cash outflow, and the NPV method uses the firm's desired rate of return of 18%. The present value of $1 due at the end of 5 years discounted at 18% is .4371. Thus, the NPV of Project A is $(265,460) [($7,400,000 cash inflow x 4371) --$3,500,000 cash outflow].

• Question 385:

  Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it

  A. Is a cost of operations that cannot be avoided?
  B. Is a cash inflow.
  C. Reduces the cash outlay for income taxes.
  D. Represents the initial cash outflow spread over the life of the investment.
  C. Reduces the cash outlay for income taxes.

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  Explanation

  Depreciation is a noncash expense that is deductible for federal income tax purposes. Hence, it directly reduces the cash outlay for income taxes and is explicitly incorporated in the capital budgeting model.

• Question 386:

  Effective design of distribution channels involves balancing many factors. Accordingly, the firm should

  A. Emphasize a push strategy by motivating customers to pressure intermediaries to sell the firm's products.
  B. Adopt a pull strategy by pressuring intermediaries to sell the firm's products.
  C. Decrease costs by increasing service outputs.
  D. Select channels that reach different segments.
  D. Select channels that reach different segments.

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  Explanation

  Channels are very diversified, and each has specific strengths and weaknesses that must be evaluated in deciding on the channel mix. Preferably, each channel En the mix should reach different segments with appropriate products at minimum cost. An objective is to avoid channel conflict, loss of control and excess cost.

• Question 387:

  Licensing, a method of expanding into international markets,

  A. Occurs Vivien goods are produced in one country and sold in another.
  B. Is cooperation by two or more firms to produce a product that is sold under one brand name.
  C. Allows a foreign firm to produce products in a specific geographic area for a fee.
  D. Is the production of parts in one country and assembly in another.
  C. Allows a foreign firm to produce products in a specific geographic area for a fee.

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  Explanation

  Licensing gives firms in foreign countries the nghtto produce or market products or services within a geographical area for a fee. Licensing a process, patent, trade secret, etc., is a way to gain a foothold in a foreign market with little immediate risk. However, the hcensor may have insufficient control over the licensees operations, profits are lost if the arrangement succeeds, and the licensee ultimately may become a competitor.

• Question 388:

  When using the net present value method for capital budgeting analysis1 the required rate of return is called all of the following except the

  A. Risk-free rate.
  B. Cost of capital.
  C. Discount rate.
  D. Cutoff rate.
  A. Risk-free rate.

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  Explanation

  The rate used to discount future cash flows is sometimes called the cost of capital, the discount rate, the cutoff rate, or the hurdle rate. A risk1ree rate is the rate available on risk-free investments such as government bonds. The risk-free rate is not equivalent to the cost of capital because the latter must incorporate a risk premium.

• Question 389:

  Sunk costs

  A. Are substitutes for opportunity costs.
  B. In and of themselves are not relevant to decision making.
  C. Are relevant to decision making.
  D. Are fixed costs.
  B. In and of themselves are not relevant to decision making.

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  Explanation

  Sunk costs are those that cannot be avoided because the expenditure has already occurred or an irrevocable decision to incur the cost has been made. Sunk costs are irrelevant to management decision making because they cannot vary with the decision choice selected.

• Question 390:

  The relevance of a particular cost to a decision is determined by?

  A. Riskiness of the decision,
  B. Number of decision variables
  C. Amount of the cost.
  D. Potential effect on the decision.
  D. Potential effect on the decision.

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  Explanation

  Relevance is the capacity of information to make a difference in a decision by helping users of that information to predict the outcomes of events or to confirm or correct prior expectations. Thus, relevant costs are those expected future costs that vary with the action taken. All other costs are constant and therefore h no effect on the decision.