IMANET IMANET-CMA Online Practice Questions and Exam Preparation

IMANET IMANET-CMA Online Questions & Answers

• Question 791:

  An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method

  A. Computes a desired rate of return for capital projects.
  B. Can be used when there is no constant rate of return required for each year of the project.
  C. Uses a discount rate that equates the discounted cash inflows with the outflows.
  D. Uses discounted cash flows whereas the internal rate of return model does not.
  B. Can be used when there is no constant rate of return required for each year of the project.

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  Explanation

  The NPV method calculates the present values of estimated future net cash inflows and compares the total with the net cost of the investment. The cost of capital must be specified. If the NPV is positive, the project should be accepted. The IRR method computes the interest rate at which the NPV is zero. The IRR method is relatively easy to use when cash inflows are the same from one year to the next. However, when cash inflows differ from year to year, the IRR can be found only through the use of trial and error. In such cases, the NPV method is usually easier to apply. Also, the NPV method can be used when the rate of return required for each year varies. For example, a company might want to achieve a higher rate of return in later years when risk might be greater. Only the NPV method can incorporate varyinq levels of rates of return.

• Question 792:

  Which of the following is an impediment to global competition?

  A. Lack of world demand.
  B. Global experience.
  C. Product redefinition.
  D. Broad line global competition.
  A. Lack of world demand.

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  Explanation

  Global introduction of a product may be hindered by lack of world demand. The reason may be that the product lacks appeal except in a few markets or that it is in an early stage of the product life cycle of world trade. Thus, initial introduction should be in a few markets where the product has the greatest appeal. Over time, with Product imitation and technology diffusion, the product may spread to new markets,

• Question 793:

  The statement of income for Dimmell Co. presented be represents the operating results for me fiscal year just ended. Dirnmell had sales of 1.800 tons of product during the current year the manufacturing capacity of Dimmells facilities is 3000 tons of products.

  

  Dimmell is considering replacing a highly labor intensive process with an automatic machine. This would result in an increase of $58,500 annually in manufacturing fixed costs The variable manufacturing costs would decrease $25 per ton The new breakeven volume in tons would be?

  A. 990 tons.
  B. 1.224 tons
  C. 1.554 tons
  D. 612 tons
  B. 1.224 tons

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  Explanation

• Question 794:

  The net present value of a proposed investment is negative; therefore, the discount rate used must be

  A. Greater than the project's internal rate of return.
  B. Less than the project's internal rate of return.
  C. Greater than the firm's cost of equity.
  D. Less than the risk-free rate.
  A. Greater than the project's internal rate of return.

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  Explanation

  The higher the discount rate, the lower the NPV. The IRR is the discount rate at which the NPV is zero. Consequently, if the NPV is negative1 the discount rate used must exceed the IRR.

• Question 795:

  Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes.What is the discounted payback period for the investment?

  A. 5. 5years.
  B. 7. 1 years.
  C. 9.2 years.
  D. 11.7years.
  C. 9.2 years.

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  Explanation

  The discounted payback period is the number of years needed to get the PV of the cash flows to equal the initial investment. At a 14% discount rate, this occurs at 9.2 years. The discounted payback period was calculated by dividing the initial investment of $4. 000000 by the annual cash flow of $800000 giving a 5. 000 Present Value of Annuity Factor at 14%, which equals approximately 9.2 years.

• Question 796:

  The following information regarding a change in credit policy was assembled by the Wilson Wax Company. The company has a required rate of return of 11% and a variable cost ratio of 50%. The opportunity' cost oaf longer collection period is assumed to be negligible.

  

  The pretax cost of carrying the additional investment in receivables, assuming a 360- dayyear, is

  A. $5,439
  B. $10,878
  C. $13,778
  D. $98,890
  A. $5,439

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  Explanation

  The cost of carrying receivables equals average receivables times the variable cost ratio times the cost of money. Under the old policy, average daily sales are $12,778 ($4,600,000 ?360 days). Given a 30- day average collection period, the average receivables balance is $383,340 ($12,778 x 30 days). Under the new policy, average daily sales are $13,778 ($4,960,000 ?360 days), and the average receivables balance is $482,230 ($13,778 x 35 days). Hence, the average balance is $98,890 higher under the new policy. Because the company's incremental (variable) costs are 50% of sales, the additional investment is $49,445 ($98,890 x 50%). The interest rate, or required rate of return1 is 11%. Thus, the incremental pretax carrying cost is $5,439 ($49,445 x 11%).

• Question 797:

  The Alumnae Corporation was recently quoted terms on a commercial bank loan of 7% discounted interest with a 20% compensating balance. The term of the loan is 1 year. The effective cost of borrowing is (rounded to the nearest hundredth)

  A. 8.75%.
  B. 941%.
  C. 7. 53%.
  D. 9.59%.
  D. 9.59%.

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  Explanation

  Assuming a $1,000 loan1 the interest at 7% for 1 year is $70. Hence, the proceeds of the loan are $930 ($1,000--$70). Also, 20% of the note or $2001 cannot be used by the borrower because of the compensating balance requirement. Consequently, only $730 is available for use by the borrower. Paying $70 interest for the use of $730 gives an interest rate of $9.59%_($70?$730).

• Question 798:

  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
  B. $26,556

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  Explanation

• Question 799:

  Madengrad Company manufactures a single electronic product called Precisionmix. This unit is a batch-density monitoring device attached to large industrial mixing machines used in flour, rubber, petroleum, and chemical manufacturing. Precisionmix sells for $900 per unit. The following variable costs are incurred to produce each Precisionmix device:

  

  Madengrad's income tax rate is 40%, and annual fixed costs are $6,600,000. Except for an operating loss incurred in the year of incorporation, the firm has been profitable over the last 5 years.Assume a 10% increase in annual fixed costs, a 20% unit cost increase for direct labor1 and a reduction in unit material costs of 25%, with no change in selling price. Madengrad Company's breakeven point would increase (decrease) (rounded to the nearest whole unit) by

  A. 3,960 units.
  B. (1.620) units.
  C. 1,604 units.
  D. 407 units.
  D. 407 units.

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  Explanation

• Question 800:

  Business risk excludes such factors as

  A. Financial risk.
  B. Amount of operating leverage.
  C. Demand variability.
  D. Fluctuations in suppliers' prices.
  A. Financial risk.

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  Explanation

  Business risk is the risk of fluctuations in earnings before interest and taxes or in operating income when the firm uses no debt. It is the risk inherent in its operations that excludes financial risk, which is the risk to the shareholders from the use of financial leverage. Business risk depends on factors such as demand variability, sales price variability, input price variability, and amount of operating leverage.