IMANET IMANET Certifications IMANET-CMA Questions & Answers

• Question 31:

  On January 1, Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end 014 years. The new asset - Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS). Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000. Will continue to generate the same operating revenues as the old asset ($200,000 per year). However, savings in operating costs will be experienced as follows: a total of $1 20.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:

  

  The discounted net-of-tax amount that should be factored into Crane Company's analysis for the disposal transaction is?

  A. $45,760.

  B. $60,000.

  C. $67,040.

  D. $68,000.

  Correct Answer: C

  The old asset can be sold for $60,000, producing an immediate cash inflow of that amount. This sale will result in a $20,000 loss for tax purposes ($80,000 -- $60,000). At a 40% tax rate, the loss, which is deemed to affect taxes paid at the end of the first year, will provide a tax savings (cash inflow) of $8,000. Because the $8,000 savings is treated as occurring at the end of the first year, it must be discounted. This discounted (present) value is $7,040 ($8,000 x .88 PV of $1 at 14% for one period). Combining the $60,000 initial inflow with the $7,040 of tax savings results in a net-of-tax amount of $67,040.

• Question 32:

  On January 1. Crane Company will acquire a new asset that costs $400,000 and is anticipated to have a salvage value of $30,000 at the end of 4 years. The new asset - Qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS). Will replace an old asset that currently has a tax basis of $80,000 and can be sold now for $60,000. Will continue to generate the same operating revenues as the old asset ($200 .000 per year). However, savings in operating costs will be experienced as follows: a total of $ 120.000 in each of the first 3 years and $90,000 in the fourth year. Crane is subject to a 40% tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze projects using the following factors and rates:

  

  The present value of the depreciation tax shield for the fourth year MACRS depreciation of Crane Company's new asset is?

  A. $0.

  B. $6,112.

  C. $6,608.

  D. $16,520.

  Correct Answer: C

  The firm will be able to deduct 7% of the asset's cost during the fourth year of the asset's life. The deduction is $28,000 ($400,000 x 7%), and the tax savings is $11,200 ($28,000 x 40%). The present value of this amount is $6,608 ($11,200 x .59 PV of $1 at 14% for four periods).

• Question 33:

  The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18.000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine Es expected to produce 4.000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value Dickins has a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis?

  A. $200,000

  B. $158,000

  C. $136,800

  D. $126,000

  Correct Answer: D

  The company will receive net cash inflows of $50 per unit ($500 selling price -- $450 of variable costs), a total of $200.000 per year for 4.000 units. This amount will be subject to taxation, as will the $10,000 gain on sale of the irwestrnent, resetting in taxable income of $210,000. No depreciation will be deducted in the tenth year because the asset was fully depreciated after 5 years. Because the asset was fully depreciated (book value was $0), the $10,000 received as salvage value is fully taxable. At 40%, the tax on $210,000 is $84,000. After subtracting $84000 of tax expense from the $210,000 of inflows the net inflows amount to $126,000.

• Question 34:

  The Dickins Corporation is considering the acquisition of a new machine at a cost of $ 180.000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value, Dickins has a marginal tax rate of 40%. What is the net cash flow for the third year that Dickins should use in a capital budgeting analysis?

  A. $136,800

  B. $136,000

  C. $128,400

  D. $107,400

  Correct Answer: A

  The company will receive net cash inflows of $50 per unit ($500 selling price -- $450 variable costs), a total of $200,000 per year for 4,000 units. This amount will be subject to taxation, However, for the first 5 years, a depreciation deduction of $42,000 per year ($210,000 cost + 5 years) will be available. Thus, annual taxable income will be $158,000 ($200,000 --$42,000). At a 40% tax rate, income tax expense will be $63,200, and the net cash inflow will be $136,800 ($200,000 -- $63200).

• Question 35:

  The Dickens Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $1 2.000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4.000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this ripe to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickens has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Dickens should use in a capital budgeting analysis?

  A. $(170,000)

  B. $(180.000)

  C. $(192,000)

  D. $(210,000)

  Correct Answer: D

  Delivery and installation costs are essential to preparing the machine for its intended use. Thus the company must initially pay $2 10.000 for the machine, consisting of the invoice price of $180,000. the delivery costs of $1 2,000, and the $18,000 of installation costs.

• Question 36:

  Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to determine the appropriate "end-of-life cash flows for the analysis. At the end of 8 years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000. and scrap salvage value of $10,000. Kore's effective tax rate is 40%. Valiant is the appropriate endow-life cash flow related to these items that should be used in the analysis?

  A. $45,000

  B. $27,000

  C. $12,000

  D. $(18,000)

  Correct Answer: C

  The tax basis of $75,000 and the $40,000 cost to remove can be written off. However, the

  -$10,000 scrap value is a cash inflow. Thus, the taxable loss is $105,000 ($75,000 loss on disposal + $40,000 expense to remove --$10,000 of inflows). At a 40% tax rate, the $ 105.000 loss will produce a tax savings (inflow) of $42,000. The final cash flows will consist of an outflow of $40,000 (cost to remove) and inflows of $10,000 (scrap) and $42,000 (tax savings), or a net inflow of $12,000.

• Question 37:

  Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net caring amount of $0. a tax basis of $150,000. a cost to remove of $80,000. and scrap salvage value of $20,000. Metrejean's effective tax rate is 40%. What is the appropriate enc$-of-life" cash flow related to these items that should be used in the analysis?

  A. $90,000

  B. $54,000

  C. $24,000

  D. $(36,000)

  Correct Answer: C

  The tax basis of $150,000 and the $80,000 cost to remove are deductible expenses, but the $20,000 scrap value is an offsetting cash inflow. Thus, the taxable loss is $210,000 ($150,000 + $80,000 --$20,000). At a 40% tax rate, the $210,000 loss will produce a tax savings (inflow) of $84,000. According. the final cash flows will consist of an outflow of $80,000 (cost to remove) and inflows of $20,000 (scrap) and $84,000 (tax savings), a net inflow of $24,000.

• Question 38:

  The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; twill cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore ha a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Moore Corporation should use in a capital budgeting analysis?

  A. $100,000

  B. $81,000

  C. $68,400

  D. $63,000

  Correct Answer: D

  The company will receive net cash inflows of $50 per unit ($500 selling price -- $450 of variable costs), or a total of $100,000 per year. This amount will be subject to taxation, as will the $5,000 gain on sale of the investment, bringing taxable income to $105,000. No depreciation will be deducted in the tenth year because the asset was fully depreciated after 5 years. Because the asset was fully depreciated (book value was zero), the $5,000 salvage value received would be fully taxable. After income taxes of $42,000 ($105,000 x 40%), the net cash flow in the tenth year is $63,000 ($105,000 --$42,000).

• Question 39:

  The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; twill cost $6,000 to transport to Moore's plant and $9,000 to install. It is seated that the machine will last 10 years. and it Es expected to have an estimated salvage value of $5,000. Over its 10year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore ha a marginal tax rate of 40%. What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis?

  A. $68,400

  B. $68,000

  C. $64,200

  D. $79,000

  Correct Answer: A

  The company will receive net cash inflows of $50 per unit ($500 selling price -- $450 of variable costs), or a total of $100,000 per year. This amount will be subject to taxation, but, for the first 5 years. there will be a "depreciation deduction of $21,000 per year ($105,000 cost divided by 5 years). Therefore, deducting the $21,000 of depreciation expense from the $ 100.000 of contribution margin will result in taxable income of $79,000. After income taxes of $31,600 ($79,000 x 40%), the net cash flow in the third year is $68,400 ($100,000 - $31,600).

• Question 40:

  The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,0O0 Over its 10year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?

  A. $(85,000)

  B. $(90,000)

  C. $(96,000)

  D. $(105,000)

  Correct Answer: D

  Initially, the company must invest $105,000 in the machine. Consisting of the invoice price of $90 00. the delivery costs of $6,000, and the installation costs of $9,000.