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Financial CMA Exam (page: 20)
Financial Certified Management Accountant
Updated on: 25-Dec-2025

Viewing Page 20 of 270
CMA PDF 1336 Questions

Details: Ranking Investment Projects 19

A company is considering two mutually exclusive projects with the following projected cash flows:



The company has a required rate of return of 8%. If the company's objective is to maximize shareholder wealth, which one of the following is the most valid reason for selecting one of the projects?

  1. The net present value of Project A is greater than the net present value of Project B, therefore select Project
  2. The net present value of Project A is less than the net present value of Project B, therefore select Project
  3. The internal rate of return of Project A is greater than the internal rate of return of Project B, therefore select Project A.
  4. The internal rate of return of Project A is less than the internal rate of return of Project B, therefore select Project B.

Answer(s): A

Explanation:

Project A has a single cash inflow, calculated as the present value of a single payment in 4 years discounted at 8%:


The net present value of Project A is thus greater than that of Project B.




Details: Ranking Investment Projects 19

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

  1. Is a cost of operations that cannot be avoided?
  2. Is a cash inflow.
  3. Reduces the cash outlay for income taxes.
  4. Represents the initial cash outflow spread over the life of the investment.

Answer(s): C

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.




Details: Ranking Investment Projects 19

Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. Ignoring the time value of money, how long will it take Henderson to recover the amount of investment?

  1. 3.5 years.
  2. 4.0 years.
  3. 4.2 years.
  4. 5 years.

Answer(s): A

Explanation:

The payback period for an investment, ignoring the time value of money, can be found by accumulating each year's net cash flows until the initial investment is recovered. The amount accumulated after 3 years is $450,000. Thus, 50% ofYear4 cash flows is needed to recover the initial investment. The payback period is 3.5 years.




Details: Ranking Investment Projects 19

Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500,000. Henderson expects its net increase in after4ax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. What is the payback reciprocal for Henderson's fleet of trucks?

  1. 29%
  2. 25%
  3. 24%
  4. 20%

Answer(s): A

Explanation:

The payback reciprocal for an investment is found by dividing 1 by the payback time. The pay back time for this investment is 3.Syears, and the pay back reciprocal is 1 divided by3.5, or29%.




Details: Ranking Investment Projects 19

Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. If the net cash flow is $ 130,000 a year, what is the payback time for Henderson's fleet of trucks?

  1. 3years.
  2. 3.l5years.
  3. 3.85 years.
  4. 4years.

Answer(s): C

Explanation:

payback period for an investment, ignoring the time value of money, can be found by accumulating each year's net cash flows until the initial investment is recovered. Therefore, dividing the $500,000 initial investment by the annual $130,000 inflow gives a payback time of 3.85 years.



Viewing Page 20 of 270



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