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Financial CMA Exam (page: 51)
Financial Certified Management Accountant
Updated on: 17-Feb-2026

Viewing Page 51 of 270
CMA PDF 1336 Questions

Details: Ranking Investment Projects 19

Rohan Transport is considering two alternative busses to transport people between cities that are in the Southeastern U.S., such as Baton Rouge and Gainesville. A gas-powered bus has a cost of $55,000, and will produce end-of-year net cash flows of $22,000 per year for 4 years. A new electric bus will cost $90,000, and will produce cash flows of $28000 per year for 8 years. The company must provide bus service for 8 years, after which it plans to give up its franchise and to cease operating the route. Inflation is not expected to affect either costs or revenues during the next 8 years. If Rohan Transports cost of capital is 16%, by what amount will the better project increase the company's value?

  1. $6,556
  2. $(14,432)
  3. $13,112
  4. $31,632

Answer(s): D

Explanation:

The NPV of the electric bus is $31,632, which is greater than that of two gas-powered busses bought4 years apart. The NPV for the $90,000 electric bus involves multiplying the $28,000 annual cash flows times the present value factor of 4.344, which equals $121,632. Deducting the $90,000 initial cost results in an NPV of $31,632. The NPV for the two gas-powered busses is $10,208, calculated as follows:




Details: Ranking Investment Projects 19

Mesa Company is considering an investment to open a new banana processing division. The project in question would entail an initial investment of $45000, and as a result of the project cash inflows of $20000 can be expected in each of the next 3 years. The hurdle rate is 10%. What is the profitability index for the project?

  1. 1.0784
  2. 1.1053
  3. 1.1379
  4. 1.1771

Answer(s): B

Explanation:

At a 10% hurdle rate1 the present value of the future inflows is:
20,000 x 2487 = $49,740
Thus, the net present value is $4,740 (49,740 -- 45000). The profitability index calculation is:
49,740 =-- 1.1053
45,000




Details: Ranking Investment Projects 19

Flex Corporation is studying a capital acquisition proposal in which newly acquired assets will be depreciated using the straight-line method. Which one of the following statements about the proposal would be incorrect if a switch is made to the Modified Accelerated Cost Recovery System (MACRS)?

  1. The net present value will increase.
  2. The internal rate of return will increase.
  3. The payback period will be shortened.
  4. The profitability index will decrease.

Answer(s): D

Explanation:

MACPS is an accelerated method of depreciation under which depreciation expense will be greater during the early years of an asset's life. Thus, the outflows for income taxes will be less in the early years, but greater in the later years1 and the NPV (present value of net cash inflows -- investment) will be increased. The profitability index (present value of net cash inflows ÷ the investment) must increase if the NPV increases.




Details: Ranking Investment Projects 19

Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:


Which project(s) should Capital Invest, Inc. undertake during the upcoming year assuming it has no budget restrictions?

  1. All of the projects.
  2. Projects 1, 2, and 3.
  3. Projects 2, 3,and 4.
  4. Projects 1, 3, and 4.

Answer(s): C

Explanation:

A company using the NPV method should undertake all projects with a positive NPV, unless some of those projects are mutually exclusive. Given that Projects 2, 3, and 4 have positive NPVs, they should be undertaken. Project 1 has a negative NPV.




Details: Ranking Investment Projects 19

Capital Invest, Inc. uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year:


Which project(s) should Capital Invest, Inc. undertake during the upcoming year if it has only $600,000 of funds available?

  1. Projects 1 and 3.
  2. Projects 2, 3, and 4.
  3. Projects 2 and 3.
  4. Projects 3 and 4.

Answer(s): D

Explanation:

Given that only $600,000 is available and that each project costs $200,000 or more, no more than two projects can be undertaken. Because Projects 3 and 4 have the greatest NPVs, profitability indexes, and IRRs, they are the projects in which the company should invest.



Viewing Page 51 of 270



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