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PART 4B
INVESTMENT DECISION ANALYSIS
216 QUESTIONS
[1] Source: CMA 0692 4- The recommended technique for evaluating projects when capital is rationed and there are no mutually exclusive projects from which to choose is to rank the projects by A. Accounting rate of return. B. Payback. C. Internal rate of return. D. Profitability index. [2] Source: CMA 0692 4- The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the A. Computed internal rate of return. B. Risk-free interest rate. C. Discount rate used in the NPV calculation. D. Firm's accounting rate of return. [3] Source: CMA 0692 4- The technique that measures the estimated performance of a capital investment by dividing the project's annual after-tax net income by the average investment cost is called the A. Bail-out payback method. B. Internal rate of return method. C. Profitability index method. D. Accounting rate of return method. [4] Source: CMA 1292 4- Regal Industries is replacing a grinder purchased 5 years ago for $15,000 with a new one costing $25,000 cash. The original grinder is being depreciated on a straight-line basis over 15 years to a zero salvage value; Regal will sell this old equipment to a third party for $6,000 cash. The new equipment will be depreciated on a straight-line basis over 10 years to a zero salvage value. Assuming a 40% marginal tax rate, Regal's net cash investment at the time of purchase if the old grinder is sold and the new one purchased is A. $19,000. B. $15,000. C. $17,400. D. $25,000. [5] Source: CMA 1292 4- Garfield, Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000, and Garfield expects to sell the equipment for $9,000 at the end of the tenth year. The equipment will be depreciated over 7 years. The project requires a working capital investment of $7,000 at its inception and another $5,000 at the end of year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is A. $32,000. B. $24,000. C. $20,000. D. $11,000. [6] Source: CMA 1292 4- The bailout payback method A. Incorporates the time value of money. B. Equals the recovery period from normal operations. C. Eliminates the disposal value from the payback calculation. D. Measures the risk if a project is terminated. [7] Source: CMA 1292 4- A weakness of the internal rate of return (IRR) approach for determining the acceptability of investments is that it A. Does not consider the time value of money. B. Is not a straightforward decision criterion. C. Implicitly assumes that the firm is able to reinvest project cash flows at the firm's cost of capital. D. Implicitly assumes that the firm is able to reinvest project cash flows at the project's internal rate of return. [8] Source: CMA 1292 4- The profitability index approach to investment analysis A. Fails to consider the timing of project cash flows. B. Considers only the project's contribution to net income and does not consider cash flow effects. C. Always yields the same accept/reject decisions for independent projects as the net present value method. D. Always yields the same accept/reject decisions for mutually exclusive projects as the net present value method. [9] Source: CMA 1292 4- The rankings of mutually exclusive investments determined using the internal rate of return method (IRR) and the net present value method (NPV) may be different when A. The lives of the multiple projects are equal and the size of the required investments are equal. B. The required rate of return equals the IRR of each project. C. The required rate of return is higher than the IRR of each project.
D. Multiple projects have unequal lives and the size of the investment for each project is different. [10] Source: CMA 1292 4- When using the net present value method for capital budgeting analysis, the required rate of return is called all of the following except the A. Risk-free rate. B. Cost of capital. C. Discount rate. D. Cutoff rate. [11] Source: CMA 1292 4- The proper discount rate to use in calculating certainty equivalent net present value is the A. Risk-adjusted discount rate. B. Cost of capital. C. Risk-free rate. D. Cost of equity capital. [12] Source: CMA 0693 4- Of the following decisions, capital budgeting techniques would least likely be used in evaluating the A. Acquisition of new aircraft by a cargo company. B. Design and implementation of a major advertising program. C. Trade for a star quarterback by a football team. D. Adoption of a new method of allocating nontraceable costs to product lines. [13] Source: CMA 0693 4- Essex Corporation is evaluating a lease that takes effect on March 1. The company must make eight equal payments, with the first payment due on March 1. The concept most relevant to the evaluation of the lease is A. The present value of an annuity due. B. The present value of an ordinary annuity. C. The future value of an annuity due. D. The future value of an ordinary annuity. [14] Source: CMA 0693 4- Amster Corporation has not yet decided on its hurdle rate for use in the evaluation of capital budgeting projects. This lack of information will prohibit Amster from calculating a project's Accounting Net Internal Rate of Return Present Value Rate of Return
A. No No No B. Yes Yes Yes
C.
No Yes Yes D. No Yes No [Fact Pattern #1] The following selected data pertain to a 4-year project being considered by Metro Industries: ｷ A depreciable asset that costs $1,200,000 will be acquired on January 1. The asset, which is expected to have a $200, salvage value at the end of 4 years, qualifies as 3-year property under the Modified Accelerated Cost Recovery System (MACRS). ｷ The new asset will replace an existing asset that has a tax basis of $150,000 and can be sold on the same January 1 for $180,000. ｷ The project is expected to provide added annual sales of 30,000 units at $20. Additional cash operating costs are: variable, $12 per unit; fixed, $90,000 per year. ｷ A $50,000 working capital investment that is fully recoverable at the end of the fourth year is required. Metro is subject to a 40% income tax rate and rounds all computations to the nearest dollar. Assume that any gain or loss affects the taxes paid at the end of the year in which it occurred. The company uses the net present value method to analyze investments and will employ the following factors and rates. Present Value Present Value of Period of $1 at 12% $1 Annuity at 12% MACRS
1 0.89 0.89 33% 2 0.80 1.69 45 3 0.71 2.40 15 4 0.64 3.04 7 [15] Source: CMA 0693 4- (Refers to Fact Pattern #1) The discounted cash flow for the fourth year MACRS depreciation on the new asset is A. $0. B. $17,920. C. $21,504. D. $26,880. [16] Source: CMA 0693 4- (Refers to Fact Pattern #1) The discounted, net-of-tax amount that relates to disposal of the existing asset is A. $168,000. B. $169,320. C. $180,000. D. $190,680. [17] Source: CMA 0693 4- (Refers to Fact Pattern #1) The expected incremental sales will provide a discounted,
without generating unacceptable results. C. Simulate probabilistic customer reactions to a new product. D. Identify the required market share to make a new product viable and produce acceptable results. [29] Source: CMA 1293 4- (Refers to Fact Pattern #2) The net present value for the investment is A. $18,800. B. $218,800. C. $196,200. D. $91,743. [30] Source: CMA 1293 4- If income tax considerations are ignored, how is depreciation handled by the following capital budgeting techniques? Internal Accounting Rate of Return Rate of Return Payback
A. Excluded Included Excluded B. Included Excluded Included C. Excluded Excluded Included D. Included Included Included [31] Source: CMA 1293 4- The annual tax depreciation expense on an asset reduces income taxes by an amount equal to A. The firm's average tax rate times the depreciation amount. B. One minus the firm's average tax rate times the depreciation amount. C. The firm's marginal tax rate times the depreciation amount. D. One minus the firm's marginal tax rate times the depreciation amount. [32] Source: CMA 1293 4- When determining net present value in an inflationary environment, adjustments should be made to A. Increase the discount rate, only. B. Increase the estimated cash inflows and increase the discount rate. C. Increase the estimated cash inflows but not the discount rate. D. Decrease the estimated cash inflows and increase the discount rate. [33] Source: CMA 1277 5- Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it A. Is a cost of operations that cannot be avoided. B. Is a cash inflow. C. Reduces the cash outlay for income taxes. D. Represents the initial cash outflow spread over the life of the investment. [34] Source: CMA 1278 5- Carco, Inc. wants to use discounted cash flow techniques when analyzing its capital investment projects. The company is aware of the uncertainty involved in estimating future cash flows. A simple method some companies employ to adjust for the uncertainty inherent in their estimates is to A. Prepare a direct analysis of the probability of outcomes. B. Use accelerated depreciation. C. Adjust the minimum desired rate of return. D. Increase the estimates of the cash flows. [35] Source: CMA 1278 5- The accountant of Ronier, Inc. has prepared an analysis of a proposed capital project using discounted cash flow techniques. One manager has questioned the accuracy of the results because the discount factors employed in the analysis have assumed the cash flows occurred at the end of the year when the cash flows actually occurred uniformly throughout each year. The net present value calculated by the accountant will A. Not be in error. B. Be slightly overstated. C. Be unusable for actual decision making. D. Be slightly understated but usable. [36] Source: CMA 1278 5- Future, Inc. is in the enviable situation of having unlimited capital funds. The best decision rule, in an economic sense, for it to follow would be to invest in all projects in which the A. Accounting rate of return is greater than the earnings as a percent of sales. B. Payback reciprocal is greater than the internal rate of return. C. Internal rate of return is greater than zero. D. Net present value is greater than zero. [37] Source: CMA 1286 5- A manager wants to know the effect of a possible change in cash flows on the net present value of a project. The technique used for this purpose is A. Sensitivity analysis.
B. Risk analysis. C. Cost behavior analysis. D. Return on investment analysis. [38] Source: CMA 1290 4- The technique that recognizes the time value of money by discounting the after-tax cash flows for a project over its life to time period zero using the company's minimum desired rate of return is called the A. Net present value method. B. Payback method. C. Average rate of return method. D. Accounting rate of return method. [39] Source: CMA 1290 4- The technique that reflects the time value of money and is calculated by dividing the present value of the future net after-tax cash inflows that have been discounted at the desired cost of capital by the initial cash outlay for the investment is called the A. Capital rationing method. B. Average rate of return method. C. Profitability index method. D. Accounting rate of return method. [40] Source: CMA 1290 4- The technique that measures the estimated performance of a capital investment by dividing the project's annual after-tax net income by the average investment cost is called the A. Average rate of return method. B. Internal rate of return method. C. Capital asset pricing model. D. Accounting rate of return method. [41] Source: CMA 1290 4- The technique that incorporates the time value of money by determining the compound interest rate of an investment such that the present value of the after-tax cash inflows over the life of the investment is equal to the initial investment is called the A. Internal rate of return method. B. Capital asset pricing model. C. Profitability index method. D. Accounting rate of return method. [42] Source: CMA 1290 4- The technique that measures the number of years required for the after-tax cash flows to recover the initial investment in a project is called the A. Net present value method. B. Payback method. C. Profitability index method. D. Accounting rate of return method. [43] Source: CMA 1290 4- High-Tech Industries is considering the acquisition of a new state-of-the-art manufacturing machine to replace a less efficient machine. Hi-Tech has completed a net present value analysis and found it to be favorable. Which one of the following factors should not be of concern to Hi-Tech in its acquisition considerations? A. The availability of any necessary financing. B. The probability of near-term technological changes to the manufacturing process. C. The investment tax credit. D. Maintenance requirements, warranties, and availability of service arrangements. [44] Source: CMA 0691 4- Fitzgerald Company is planning to acquire a $250, machine that will provide increased efficiencies, thereby reducing annual operating costs by $80,000. The machine will be depreciated by the straight-line method over a 5-year life with no salvage value at the end of 5 years. Assuming a 40% income tax rate, the machine's payback period is A. 3.13 years. B. 3.21 years. C. 3.68 years. D. 4.81 years. [45] Source: CMA 0691 4- Capital budgeting methods are often divided into two classifications: project screening and project ranking. Which one of the following is considered a ranking method rather than a screening method? A. Net present value. B. Time-adjusted rate of return. C. Profitability index. D. Accounting rate of return. [46] Source: CMA 0691 4- The accounting rate of return A. Is synonymous with the internal rate of return. B. Focuses on income as opposed to cash flows. C. Is inconsistent with the divisional performance measure known as return on investment. D. Recognizes the time value of money. [47] Source: CMA 0691 4- The internal rate of return on an investment A. Usually coincides with the company's hurdle rate. B. Disregards discounted cash flows.
D. $46,667.
[53] Source: CMA 1291 4- (Refers to Fact Pattern #4) The accounting rate of return for the investment proposal over its life using the initial value of the investment is A. 36.2%. B. 18.1%. C. 28.1%. D. 38.1%. [54] Source: CMA 1291 4- (Refers to Fact Pattern #4) The net present value of the investment proposal is A. $4,600. B. $10,450. C. $(55,280). D. $115,450. [55] Source: CMA 1291 4- When ranking two mutually exclusive investments with different initial amounts, management should give first priority to the project A. That generates cash flows for the longer period of time. B. Whose net after-tax flows equal the initial investment. C. That has the greater accounting rate of return. D. That has the greater profitability index. [56] Source: CMA 1291 4- The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze capital expenditures. The IRR method, as contrasted with the NPV method, A. Is considered inferior because it fails to calculate compounded interest rates. B. Incorporates the time value of money whereas the NPV method does not. C. Assumes that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used. D. Is preferred in practice because it is able to handle multiple desired hurdle rates, which is impossible with the NPV method. [Fact Pattern #5] Mercken Industries is contemplating four projects, Project P, Project Q, Project R, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%. Project P Project Q Project R Project S
Initial cost $200,000 $235,000 $190, $210, Annual cash flows Year 1 $93,000 $90,000 $45,000 $40, Year 2 93,000 85,000 55,000 50, Year 3 93,000 75,000 65,000 60, Year 4 -0- 55,000 70,000 65, Year 5 -0- 50,000 75,000 75, Net present value $23,370 $29,827 $27, $(7,854) Internal rate of return 18.7% 17.6% 17.2% 10.6% Excess present value index 1.12 1.13 1.14 0. [57] Source: CMA 1291 4- (Refers to Fact Pattern #5) During this year, Mercken will choose A. Projects P, Q, and R. B. Projects P, Q, R, and S. C. Projects Q and R. D. Projects P and Q. [58] Source: CMA 1291 4- (Refers to Fact Pattern #5) If Mercken is able to accept only one project, the company would choose A. Project P. B. Project Q because it has the highest net present value. C. Project P because it has the highest internal rate of return. D. Project P because it has the shortest payback period. [59] Source: Publisher Capital budgeting is concerned with A. Decisions affecting only capital intensive industries. B. Analysis of short-range decisions. C. Analysis of long-range decisions. D. Scheduling office personnel in office buildings. [60] Source: Publisher Capital budgeting is used for the decision analysis of A. Adding product lines or facilities. B. Multiple profitable alternatives. C. Lease-or-buy decisions. D. All of the answers are correct. [61] Source: Publisher Basic time value of money concepts concern Interest Factors Risk Cost of Capital
A.
Yes Yes No B. Yes No Yes C. No Yes No D. No No Yes [62] Source: Publisher The present value may be calculated for discounted cash Inflows Outflows Annuities
A. Yes Yes Yes B. Yes No Yes C. No Yes No D. No No Yes [63] Source: Publisher Future value is best described as A. The sum of dollars-in discounted to time zero. B. The sum of dollars-out discounted to time zero. C. The value of a dollar-in at a future time adjusted for any compounding effect D. The value of a dollar-in at a future time adjusted for any compounding effect and the value of a dollar-out at a future time adjusted for any compounding effect. [64] Source: Publisher Which formula is used to determine the future value that will be available if a given amount of money is invested? A. A(1 + i)・ B. A
(1 + i) ・ C. ﾚ ｿ ｳ n-1 ｳ ｳ (1 + i) ｳ = A ｳ ---------- ｳ ｳ i ｳ ﾀ ﾙ D. ﾚ ｿ ｳ 1 - 1/(1 + i)・ｳ
= A ｳ -------------- ｳ
ｳ i ｳ ﾀ ﾙ [65] Source: Publisher The discount rate ordinarily used in present value calculations is the A. Federal Reserve rate. B. Treasury bill rate. C. Minimum desired rate of return set by the firm. D. Prime rate. [66] Source: Publisher The bailout payback method A. Is used by firms with federally insured loans. B. Calculates the payback period using the sum of the net cash flows and the salvage value. C. Calculates the payback period using the difference between net cash inflow and the salvage value. D. Estimates short-term profitability. [67] Source: CMA 1288 1- Which of the following is true regarding the calculation of a firm's cost of capital? A. The cost of capital of a firm is the weighted-average cost of its various financing components. B. All costs should be expressed as pre-tax costs. C. The time value of money should be excluded from the calculations. D. The cost of capital is the cost of equity. [68] Source: CMA 1291 1- The firm's marginal cost of capital A. Should be the same as the firm's rate of return on equity. B. Is unaffected by the firm's capital structure. C. Is inversely related to the firm's required rate of return used in capital budgeting. D. Is a weighted average of the investors' required returns on debt and equity. [69] Source: CMA 1291 1- An analysis of a company's planned equity financing using the Capital Asset Pricing Model (or Security Market Line) incorporates only the A. Expected market earnings, the current U.S. treasury bond yield, and the beta coefficient. B. Expected market earnings and the price-earnings ratio. C. Current U.S. treasury bond yield, the price-earnings ratio, and the beta coefficient.
B. Neglects total project profitability. C. Uses accrual accounting inflows in the numerator of the calculation. D. Uses the estimated expected life of the asset in the denominator of the calculation. [79] Source: CMA 0694 4- All of the following items are included in discounted cash flow analysis except A. Future operating cash savings. B. The current asset disposal price. C. The future asset depreciation expense. D. The tax effects of future asset depreciation. [80] Source: CMA 1294 4- The length of time required to recover the initial cash outlay of a capital project is determined by using the A. Discounted cash flow method. B. Payback method. C. Weighted net present value method. D. Net present value method. [81] Source: CMA 1294 4- In evaluating a capital budget project, the use of the net present value (NPV) model is generally not affected by the A. Method of funding the project. B. Initial cost of the project. C. Amount of added working capital needed for operations during the term of the project. D. Project's salvage value. [82] Source: CMA 1294 4- For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management A. Wants to use equity funding exclusively. B. Believes too many proposals are being rejected. C. Believes bank loans are riskier than capital investments. D. Wants to factor risk into its consideration of projects. [83] Source: CMA 1294 4- The method that recognizes the time value of money by discounting the after-tax cash flows over the life of a project, using the company's minimum desired rate of return is the A. Accounting rate of return method. B. Net present value method. C. Internal rate of return method. D. Payback method. [84] Source: CMA 1294 4- The method that divides a project's annual after-tax net income by the average investment cost to measure the estimated performance of a capital investment is the A. Internal rate of return method. B. Accounting rate of return method. C. Payback method. D. Net present value (NPV) method. [85] Source: CMA 1294 4- The capital budgeting model that is generally considered the best model for long-range decision making is the A. Payback model. B. Accounting rate of return model. C. Unadjusted rate of return model. D. Discounted cash flow model. [86] Source: CMA 1294 4- The technique used to evaluate all possible capital projects of different dollar amounts and then rank them according to their desirability is the A. Profitability index method. B. Net present value method. C. Payback method. D. Discounted cash flow method. [87] Source: CMA 1294 4- A widely used approach that is used to recognize uncertainty about individual economic variables while obtaining an immediate financial estimate of the consequences of possible prediction errors is A. Expected value analysis. B. Learning curve analysis. C. Sensitivity analysis. D. Regression analysis. [88] Source: CMA 0695 4- 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.
[89] Source: CMA 0695 4- Sensitivity analysis, if used with capital projects, A. Is used extensively when cash flows are known with certainty. B. Measures the change in the discounted cash flows when using the discounted payback method rather than the net present value method. C. Is a "what-if" technique that asks how a given outcome will change if the original estimates of the capital budgeting model are changed. D. Is a technique used to rank capital expenditure requests. [90] Source: CMA 0695 4- The use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of A. Raising the hurdle rate necessary to justify the project. B. Lowering the net present value of the project. C. Increasing the present value of the depreciation tax shield. D. Increasing the cash outflows at the initial point of the project. [91] Source: CMA 0695 4- The profitability index (present value index) A. Represents the ratio of the discounted net cash outflows to cash inflows. B. Is the relationship between the net discounted cash inflows less the discounted cash outflows divided by the discounted cash outflows. C. Is calculated by dividing the discounted profits by the cash outflows. D. Is the ratio of the discounted net cash inflows to discounted cash outflows. [Fact Pattern #7] McLean Inc. is considering the purchase of a new machine that will cost $160,000. The machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base will be depreciated in the first year, 40% in the second year, and 30% in the third year. The new machine will have a $10,000 resale value at the end of its estimated useful life. The machine is expected to save the company $85,000 per year in operating expenses. McLean uses a 40% estimated income tax rate and a 16% hurdle rate to evaluate capital projects. Discount rates for a 16% rate are as follows: Present Value of an Present Value of $1 Ordinary Annuity of $
Year 1 .862. Year 2 .743 1. Year 3 .641 2. [92] Source: CMA 0695 4- (Refers to Fact Pattern #7) What is the net present value of this project?
A. $3,
B. $5,
C. $(568)
D. $30,
[93] Source: CMA 0695 4- (Refers to Fact Pattern #7) The payback period for this investment would be A. 1.88 years. B. 3.00 years. C. 2.23 years. D. 1.62 years. [Fact Pattern #8] 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. Project 1 Project 2 Project 3 Project 4
Initial capital outlay $200,000 $298,000 $248, $272, Annual net cash inflows Year 1 $ 65,000 $100,000 $ 80,000 $ 95, Year 2 70,000 135,000 95,000 125, Year 3 80,000 90,000 90,000 90, Year 4 40,000 65,000 80,000 60, Net present value (3,798) 4,276 14, 14, Profitability Index 98% 101% 106% 105% Internal rate of return 11% 13% 14% 15% [94] Source: CMA 0695 4- (Refers to Fact Pattern #8) Which project(s) should Capital Invest Inc. undertake during the upcoming year assuming it has no budget restrictions? A. All of the projects. B. Projects 1, 2, and 3. C. Projects 2, 3, and 4. D. Projects 1, 3, and 4. [95] Source: CMA 0695 4- (Refers to Fact Pattern #8) Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $600,000 of funds available? A. Projects 1 and 3. B. Projects 2, 3, and 4. C. Projects 2 and 3. D. Projects 3 and 4. [96] Source: CMA 0695 4- (Refers to Fact Pattern #8) Which project(s) should Capital Invest Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?
C. $96,
D. $107,
[105] Source: CMA 1295 4- Which one of the following statements about the payback method of investment analysis is correct? The payback method A. Does not consider the time value of money. B. Considers cash flows after the payback has been reached. C. Uses discounted cash flow techniques. D. Generally leads to the same decision as other methods for long-term projects. [106] Source: CMA 1295 4- Barker Inc. has no capital rationing constraint and is analyzing many independent investment alternatives. Barker should accept all investment proposals A. If debt financing is available for them. B. That have positive cash flows. C. That provide returns greater than the before-tax cost of debt. D. That have a positive net present value. [107] Source: CMA 1295 4- Which one of the following statements concerning cash flow determination for capital budgeting purposes is not correct? A. Tax depreciation must be considered because it affects cash payments for taxes. B. Book depreciation is relevant because it affects net income. C. Sunk costs are not incremental flows and should not be included. D. Net working capital changes should be included in cash flow forecasts. [Fact Pattern #10] Willis Inc. has a cost of capital of 15% and is considering the acquisition of a new machine which costs $400, and has a useful life of 5 years. Willis projects that earnings and cash flow will increase as follows: Net After-Tax Year Earnings Cash Flow
1 $100,000 $160, 2 100,000 140, 3 100,000 100, 4 100,000 100, 5 200,000 100, 15% Interest Rate Factors
Present Present Value of Period Value of $1 an Annuity of $
1 0.87 0. 2 0.76 1. 3 0.66 2. 4 0.57 2.
[108] Source: CMA 1295 4- (Refers to Fact Pattern #10) The net present value of this investment is A. Negative, $64,000. B. Negative, $14,000. C. Positive, $18,600. D. Positive, $200,000. [109] Source: CMA 1295 4- (Refers to Fact Pattern #10) What is the payback period of this investment? A. 1.50 years. B. 3.00 years. C. 3.33 years. D. 4.00 years. [110] Source: CMA 1295 4- 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. [111] Source: CMA 1295 4- Kore Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. The analyst is attempting to determine the appropriate "end-of-life" cash flows for the analysis. At the end of 8 years, the equipment must be removed from the plant and will have a net book value of zero, a tax basis of $75,000, a cost to remove of $40,000, and scrap salvage value of $10,000. Kore's effective tax rate is 40%. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis? A. $45, B. $27, C. $12, D. $(18,000) [112] Source: CMA 1295 4- A disadvantage of the net present value method of capital expenditure evaluation is that it A. Is calculated using sensitivity analysis. B. Computes the true interest rate. C. Does not provide the true rate of return on investment. D. Is difficult to apply because it uses a trial-and-error approach.
[113] Source: CMA 1295 4- The term that refers to costs incurred in the past that are not relevant to a future decision is A. Discretionary cost. B. Full absorption cost. C. Underallocated indirect cost. D. Sunk cost. [114] Source: CMA 1295 4- In equipment-replacement decisions, which one of the following does not affect the decision-making process? A. Current disposal price of the old equipment. B. Operating costs of the old equipment. C. Original fair market value of the old equipment. D. Cost of the new equipment. [Fact Pattern #11] Jorelle Company's financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return. Investment Proposal Purchase Cost Annual Net Annual Year and Book Value After-Tax Cash Flows Net Income
0 $250,000 $ 0 $ 0 1 168,000 120,000 35, 2 100,000 108,000 39, 3 50,000 96,000 43, 4 18,000 84,000 47, 5 0 72,000 51, Discounted Factors for a 12% Rate of Return Present Value of an Present Value of $1.00 Annuity of $1. Received at the End Received at the Year of Each Period End of Each Period
1 .89. 2 .80 1. 3 .71 2. 4 .64 3. 5 .57 3. 6 .51 4. [115] Source: CMA 0696 4- (Refers to Fact Pattern #11) The accounting rate of return on the average investment proposal is A. 12.0% B. 17.2% C. 28.0% D. 34.4% [116] Source: CMA 0696 4- (Refers to Fact Pattern #11) The net present value for the investment proposal is A. $106, B. $(97,970) C. $356, D. $96, [117] Source: CMA 0696 4- (Refers to Fact Pattern #11) The traditional payback period for the investment proposal is A. Over 5 years. B. 2.23 years. C. 1.65 years. D. 2.83 years. [118] Source: CMA 0696 4- Which one of the following capital investment evaluation methods does not take the time value of money into consideration? A. Net present value. B. Discounted payback. C. Internal rate of return. D. Accounting rate of return. [119] Source: CMA 1296 4- Whatney Co. is considering the acquisition of a new, more efficient press. The cost of the press is $360,000, and the press has an estimated 6-year life with zero salvage value. Whatney uses straight-line depreciation for both financial reporting and income tax reporting purposes and has a 40% corporate income tax rate. In evaluating equipment acquisitions of this type, Whatney uses a goal of a 4-year payback period. To meet Whatney's desired payback period, the press must produce a minimum annual before-tax operating cash savings of A. $90, B. $110, C. $114, D. $150, [120] Source: CMA 1296 4- The relevance of a particular cost to a decision is determined by A. Riskiness of the decision. B. Number of decision variables. C. Amount of the cost. D. Potential effect on the decision. [Fact Pattern #12] In order to increase production capacity, Gunning Industries is considering replacing an existing production machine with a new technologically improved machine
In the determination of a present value, which of the following relationships is correct? A. The lower the discount rate and the shorter the discount period, the lower the present value. B. The lower the future cash flow and the shorter the discount period, the lower the present value. C. The higher the discount rate and the longer the discount period, the lower the present value. D. The higher the future cash flow and the longer the discount period, the lower the present value. [130] Source: CIA 1192 IV- A company plans to purchase a machine with the following conditions: ｷ Purchase price = $300,000. ｷ The down payment = 10% of purchase price with remainder financed at an annual interest rate of 16%. ｷ The financing period is 8 years with equal annual payments made every year. ｷ The present value of an annuity of $1 per year for 8 years at 16% is 4.3436. ｷ The present value of $1 due at the end of 8 years at 16% is .3050. The annual payment (rounded to the nearest dollar) is A. $39, B. $43, C. $62, D. $82, [131] Source: CIA 1188 IV- A corporation is contemplating the purchase of a new piece of equipment with a purchase price of $500,000. It plans to make a 10% down payment and will receive a loan for 25 years at 10% interest. The present value interest factor for an annuity of $1 per year for 25 years at 10% is 9.8226. The annual payment (to the nearest dollar) required on the loan will be A. $18, B. $45, C. $45, D. $50, [132] Source: CIA 1190 III- An individual is to receive $137,350 in 4 years. Using the correct factor, determine the current investment if interest of 10% is assumed. Periods FVIF PVIF FVIFA PVIFA
1 1.1000 .9091 1.0000. 2 1.2100 .8264 2.1000 1. 3 1.3310 .7513 3.2781 2. 4 1.4641 .6830 4.5731 3. 5 1.6105 .6029 5.9847 3. A. $30,034. B. $43,329.
C. $93,810.
D. $201,094.
[133] Source: CIA 1193 IV- A pension fund is projecting the amount necessary today to fund a retiree's pension benefits. The retiree's first annual pension check will be in 10 years. Payments are expected to last for a total of 20 annual payments. Which of the following best describes the computation of the amount needed today to fund the retiree's annuity? A. Present value of $1 for 10 periods, times the present value of an ordinary annuity of 20 payments, times the annual annuity payment. B. Present value of $1 for nine periods, times the present value of an ordinary annuity of 20 payments, times the annual annuity payment. C. Future value of $1 for 10 periods, times the present value of an ordinary annuity of 20 payments, times the annual annuity payment. D. Future value of $1 for nine periods, times the present value of an ordinary annuity of 20 payments, times the annual annuity payment. [134] Source: CIA 1192 IV- An actuary has determined that a company should have $90,000,000 accumulated in its pension fund 20 years from now in order for the fund to be able to meet its obligations. An interest rate of 8% is considered appropriate for all pension fund calculations involving an interest component. The company wishes to calculate how much it should contribute to the pension fund at the end of each of the next 20 years in order for the pension fund to have its required balance in 20 years. Assume you are given the following two factors from present value and future value tables:
- Factor for present value of an ordinary annuity for n=20, i=8%
- Factor for future value of an ordinary annuity for n=20, i=8% Which of the following sets of instructions correctly describes the procedures necessary to compute the annual amount the company should contribute to the fund? A. Divide $90,000,000 by the factor for present value of an ordinary annuity for n=20, i=8%. B. Multiply $90,000,000 by the factor for present value of an ordinary annuity for n=20, i=8%. C. Divide $90,000,000 by the factor for future value of an ordinary annuity for n=20, i=8%. D. Multiply $90,000,000 by the factor for future value of an ordinary annuity for n=20, i=8%. [135] Source: CIA 0582 IV- A loan is to be repaid in eight annual installments of $1,875. The interest rate is 10%. The present value of an ordinary annuity for eight periods at 10% is 5.33. Identify the computation that approximates the outstanding loan balance at the end of the first year. A. $1,875 x 5.33 = $9, B. $1,875 x 5.33 = $9,994; $9,994 - $1,875 = $8,
C. $1,875 x 5.33 = $9,994; $1,875 - $999 = $876; $9,994 - $876 = $9, D. $1,875 x 8 = $15,000; $15,000 - ($1,875 - $1,500) = $14, [Fact Pattern #13] Present value, amount of $1, and ordinary annuity information are presented below. All values are for four periods with an interest rate of 8%. Amount of $1. Present value of $1 0. Amount of an ordinary annuity of $1 4. Present value of an ordinary annuity of $1 3. [136] Source: CIA 0582 IV- (Refers to Fact Pattern #13) Jim Green decides to create a fund to earn 8% compounded annually that will enable him to withdraw $5,000 per year each June 30, beginning in year 5 and continuing through year 9. Jim wishes to make equal contributions on June 30 of each of the years year 1 through year 4. Which equation would be used to compute the balance which must be in the fund on June 30, year 4 for Jim to satisfy his objective? A. $X = $5,000 x 3. B. $X = $5,000 x (3.31 + 1.00) C. $X = $5,000 x 1. D. $X = $5,000 x 4. [137] Source: CIA 0582 IV- (Refers to Fact Pattern #13) Jones wants to accumulate $50,000 by making equal contributions at the end of each of 4 succeeding years. Which equation would be used to compute Jones's annual contribution to achieve the $50,000 goal at the end of the fourth year? A. $X = $50,000 ・4. B. $X = $50,000 ・4. C. $X = $12,500 ・1. D. $X = $50,000 ・3. [138] Source: Publisher Which formula is used to determine the future value that will be available if a given amount of money is invested? A. A(1 + i)・ B. A
(1 + i)・ C. ﾚ n - 1 ｿ ｳ (1 + i) ｳ A ｳ -------- ｳ ｳ i ｳ ﾀ ﾙ D.
ｳ 1 - 1/(1 + i)・ A ｳ --------------ｳ ｳ i ｳ ﾀ ﾙ [139] Source: Publisher The following formulas are relevant to this question: n I. FV = A/(1 + i)+ A/(1 + i)ｲ + ... + A/(1 + i) n- II. FV = A(1 + i) + ... + A(1 + i) + A How is the following equation for the future value of an annuity derived? ﾚ ｿ ｳ (1 + i)・- 1 ｳ FV = A ｳ --------------- ｳ ｳ i ｳ ﾀ ﾙ A. Multiply Equation I by 1/(1 + i) and subtract the product from Equation II. B. Multiply Equation II by (1 + i) and subtract the product from Equation II. C. Multiply Equation II by (1 + i) and subtract Equation II from the product. D. Multiply Equation I by (1 + i) and subtract Equation I from the product. [140] Source: Publisher Which of the following is a series of equal payments at equal intervals of time when each payment is received at the beginning of each time period? A. Ordinary annuity. B. Annuity in arrears. C. Annuity due. D. Payments in advance. [141] Source: Publisher If the interest rate is to be determined in a given transaction in which the present value and future value are known, which formula would be used? A. n (1 + i) = FV
PV B. n PV = FV x (1 + i) C. n - 1 PV x FV = (1 + i) D. n PV FV = -------- n (1 + i)
B. Projects 1, 2, and 4. C. Projects 1 and 4. D. Projects 1 and 2. [149] Source: Publisher (Refers to Fact Pattern #15) Which project(s) should Maloney undertake during the upcoming year if it has only $6,000,000 of funds available? A. Project 3. B. Projects 1 and 2. C. Project 1. D. Project 2. [Fact Pattern #16] A proposed investment is not expected to have any salvage value at the end of its 5-year life. For present value purposes, cash flows are assumed to occur at the end of each year. The company uses a 12% after-tax target rate of return. Purchase Cost Annual Net After- Annual Year and Book Value Tax Cash Flows Net Income
0 $500,000 $ 0 $ 0 1 336,000 240,000 70, 2 200,000 216,000 78, 3 100,000 192,000 86, 4 36,000 168,000 94, 5 0 144,000 102, Discount Factors for a 12% Rate of Return Present Value of $1 at Present Value of an Annuity of Year the End of Each Period $1 at the End of Each Period
1 .89. 2 .80 1. 3 .71 2. 4 .64 3. 5 .57 3. 6 .51 4. [150] Source: Publisher (Refers to Fact Pattern #16) The accounting rate of return based on the average investment is A. 84.9% B. 34.4% C. 40.8% D. 12% [151] Source: Publisher (Refers to Fact Pattern #16) The net present value is A. $304, B. $212, C. $(70,000) D. $712, [152] Source: Publisher (Refers to Fact Pattern #16) The traditional payback period is A. Over 5 years. B. 2.23 years. C. 1.65 years. D. 2.83 years. [153] Source: Publisher (Refers to Fact Pattern #16) The profitability index is A.. B.. C.. D. 1. [154] Source: Publisher (Refers to Fact Pattern #16) Which statement about the internal rate of return of the investment is true? A. The IRR is exactly 12%. B. The IRR is over 12%. C. The IRR is under 12%. D. No information about the IRR can be determined. [Fact Pattern #17] The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18,000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine is expected to produce 4, units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Dickins has a marginal tax rate of 40%. [155] Source: Publisher (Refers to Fact Pattern #17) What is the net cash outflow at the beginning of the first year that Dickins should use in a capital budgeting analysis? A. $(170,000) B. $(180,000) C. $(192,000) D. $(210,000) [156] Source: Publisher (Refers to Fact Pattern #17) What is the net cash flow for the third year that Dickins Corporation should use in a capital budgeting analysis? A. $136, B. $136, C. $128,
D. $107,
[157] Source: Publisher (Refers to Fact Pattern #17) What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis? A. $200, B. $158, C. $136, D. $126, [158] Source: Publisher (Refers to Fact Pattern #17) What is the approximate payback period on the new machine? A. 1.05 years. B. 1.54 years. C. 1.33 years. D. 2.22 years. [159] Source: Publisher Kline Corporation is expanding its plant, which requires an investment of $8 million in new equipment. Kline's sales are expected to increase by $6 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales, and accounts payable and other current liabilities are 10% of sales. What is the estimated total cash investment for this expansion? A. $6.8 million. B. $8.6 million. C. $9.2 million. D. $9.8 million. [160] Source: Publisher Use the following 8% interest rate factors for this question. Future Value of Period Future Value of $1 Annuity of $
1 1.08 1. 2 1.17 2. 3 1.26 3. 4 1.36 4. The Suellen Company has $150,000 in a bank account as of December 31, 2001. If the company plans to deposit $8,000 in the account at the end of each of the next 3 years (2002, 2003, and 2004), and all amounts in the account earn 8% per year, what will the account balance be at December 31, 2004? Ignore the effect of income taxes. A. $174, B. $176, C. $192, D. $215, [Fact Pattern #18] Tonya Inc. has a cost of capital of 15% and is considering the acquisition of a new machine that costs $800,000 and has a useful life of 5 years. Tonya projects that earnings and cash flow will increase as follows: Year Net Earnings After-Tax Cash Flow
1 $200,000 $320, 2 200,000 280, 3 200,000 200, 4 200,000 200, 5 200,000 200, Interest rate factors at 15% are as follows: Present Value Period Present Value of $1 of an Annuity
1 .87 0. 2 .76 1. 3 .66 2. 4 .57 2. 5 .50 3. [161] Source: Publisher (Refers to Fact Pattern #18) The net present value of this investment is A. $(128,000) B. $200, C. $37, D. $400, [162] Source: Publisher (Refers to Fact Pattern #18) What is the profitability index for the investment? A. 0. B. 0. C. 1. D. 1. [163] Source: Publisher (Refers to Fact Pattern #18) What is the payback period of this investment? A. 1.5 years. B. 3.0 years. C. 3.3 years. D. 4.0 years. [164] Source: Publisher Metrejean Industries is analyzing a capital investment proposal for new equipment to produce a product over the next 8 years. At the end of 8 years, the equipment must be removed from the plant and will have a net book value of $0, a tax basis of $150,000, a cost to remove of $80,000, and scrap salvage value of $20,000. Metrejean's effective tax rate is 40%. What is the appropriate "end-of-life" cash flow related to these items that should be used in the analysis? A. $90, B. $54, C. $24,
