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Financial CMA Exam (page: 18)
Financial Certified Management Accountant
Updated on: 15-Feb-2026

Viewing Page 18 of 270
CMA PDF 1336 Questions

Details: Ranking Investment Projects 19

All of the following are the rates used in net present value analysis except for the

  1. Cost of capital.
  2. Hurdle rate.
  3. Discount rate.
  4. Accounting rate of return.

Answer(s): D

Explanation:

The NPV is the excess of the present values of the estimated cash inflows over the net cost of the investment. The discount rate used is sometimes the cost of capital or other hurdle rate designated by management. This rate is also called the required rate of return. The accounting rate of return is never used in NPV analysis because it ignores the time value of money; it is computed by dividing the accounting net income by the investment.




Details: Ranking Investment Projects 19

In evaluating a capital budget project, the use of the net present value (NPV) model is generally not affected by the

  1. Method of funding the project.
  2. Initial cost of the project.
  3. Amount of added working capital needed for operations during the term of the project.
  4. Project's salvage value.

Answer(s): A

Explanation:

The NPV method computes the present value of future cash inflows to determine whether they are greater than the initial cash outflow. Future cash inflows include any salvage value on facilities. Included in the initial investment are the cost of new equipment and other facilities, and additional working capital needed for operations during the term of the project. The discount rate (cost of capital or hurdle rate) must be known to discount the future cash inflows. If the NPV is positive, the project should be accepted. The method of funding a project is a decision separate from that of whether to invest.




Details: Ranking Investment Projects 19

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

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

Answer(s): B

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.




Details: Ranking Investment Projects 19

Basic time value of money concepts concern Interest Factors Risk Cost of capital

  1. Yes Yes No
  2. Yes No Yes
  3. No Yes No
  4. No No Yes

Answer(s): A

Explanation:

The time value of money is concerned with two issues: (1)the investment value of money, and (2) the risk (uncertainty) inherent in any executor agreement. Thus, a dollar today is worth more than a dollar in the future, and the longer one waits for a dollar, the more uncertain the receipt is. The cost of capital involves a specific, 1application of the time value of money principles; It is not a basic concept thereof.




Details: Ranking Investment Projects 19

The present value may be calculated for discounted cash Inflows Outflows Annuities

  1. Yes Yes Yes
  2. Yes No Yes
  3. No Yes No
  4. No No Yes

Answer(s): A

Explanation:

The present value concept may be applied both to dollars-in (inflows) and to dollars-out (outflows). Thus, individual cash inflows and cash outflows or a series thereof (an annuity') may be discounted to time: zero (the present). Net present value is the sum of discounted cash inflows minus any discounted cash outflows. Net present value may be either positive or negative.



Viewing Page 18 of 270



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