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Financial CMA Exam (page: 21)
Financial Certified Management Accountant
Updated on: 25-Dec-2025

Viewing Page 21 of 270
CMA PDF 1336 Questions

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. Based on a 6% annual interest rate, what is the discounted payback period for Henderson's fleet of trucks?

  1. 3.Syears.
  2. 3.98 years.
  3. 4.25years.
  4. 5.0 years.

Answer(s): C

Explanation:

The discounted payback period for an investment, assuming a 6% discount1 can be found by accumulating each year's discounted net cash flows until the initial investment is recovered.


Thus, the answer is something greater than four years. After four years, an additional $18,581 .75 ($500,000-- $481 .418.25) is needed. The calculation for the fifth year is $74,726 ($100,000 x .74726). Consequently, the discounted payback period is approximately 4.25 years [4 + ($18581.75 + $74,726)].




Details: Ranking Investment Projects 19

The capital budgeting model that is generally considered the best model for long-range decision making is the

  1. Payback model.
  2. Accounting rate of return model.
  3. Unadjusted rate of return model.
  4. Discounted cash flow model.

Answer(s): D

Explanation:

The capital budgeting methods that are generally considered the best for long-range decision 1making are the internal rate of return and net present value methods. These are both discounted cash flow methods.




Details: Ranking Investment Projects 19

When evaluating projects, breakeven time is best described as

  1. Annual fixed costs ÷ monthly contribution margin.
  2. Project investment + annual net cash inflows.
  3. The point where cumulative cash inflows on a project equal total cash outflows.
  4. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows.

Answer(s): D

Explanation:

Breakeven time is a capital budgeting tool that is widely used to evaluate the rapidity of new product development. It is the period required for the discounted cumulative cash inflows for a project to equal the discounted cumulative cash outflows. The concept is similar to the payback period, but it is more sophisticated because it incorporates the time value of money. It also differs from the payback method because the period covered begins at the outset of a project, not when the initial cash outflow occurs.




Details: Ranking Investment Projects 19

lrwinn Co. is considering an investment in a capital project. The sole outlay will be $800,000 at the outset of the project and the annual net after-tax cash inflow will be $216,309.75 for 6 years. The present value factors at lrwinn's 8% cost 01 capital are


What is the breakeven time (BET)?

  1. 3.70 years.
  2. 4.57 years.
  3. 5.O0years.
  4. 6.O0years.

Answer(s): B

Explanation:

Breakeven time is a more sophisticated version of the payback method. Breakeven time is `defined as the period required for the discounted cumulative cash inflows on a project to equal the discounted cumulative cash outflows (usually the initial cost). Thus, it is the time necessary for the present value of the discounted cash flows to equal zero. This period begins at the outset of a project, not when the initial cash outflow occurs.
Accordingly, the BET is calculated as follows:




Details: Ranking Investment Projects 19

A characteristic of the payback method (before taxes) is that it

  1. Incorporates the time value of money.
  2. Neglects total project profitability'.
  3. Uses accrual accounting inflows in the numerator of the calculation.
  4. Uses the estimated expected life of the asset in the denominator of the calculation.

Answer(s): B

Explanation:

The payback method calculates the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment required by the average expected cash, 1flow to be generated, resulting in the number of years required to recover the original investment. Payback is easy to `calculate but has two principal problems: it ignores the time value of money, and it gives no consideration to returns, after the payback period. Thus, it ignores total project profitability'.



Viewing Page 21 of 270



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