IMANET CMA Exam Practice Test Instant Access

Question 1

Which of the following is irrelevant in projecting the cash flows of the final year of a capital project?

ACash devoted to use in project.

BDisposal value of equipment purchased specifically for project

CDepreciation tax shield generated by equipment purchased specifically for project.

DHistorical cost of equipment disposed of in the projects first year.

Answer : D

Once an old piece of equipment has been disposed of, its histoncal cost no longer has an impact on a firms cash flows.

Question 2

A firm is exploring the possibility of engaging in a new capital project. A salvage company is offering the him more for its old equipment than the equipment's book value. If the firm accepts the salvage company's offer, the reduction to the net initial investment in the project will be?

ALess than if the salvage company's offer had resulted in a loss.

BGreater than if the salvage company's offer had resulted in a loss

CThe same as if the salvage company's offer had reused in a loss.

DNot determinable from the information given.

Answer : A

Since the salvage company's offer is for more than the book value of the equipment, an accrual- basis gain would result A loss on disposal of old equipment results in a tax benefit, since the loss reduces accrual basis income. Therefore, a gain. which increases accrual-basis income, results in a tax detriment, and the reduction to the net initial investment will be less than if the salvage company's offer had resulted in a loss.

Question 3

Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, which will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. The total after-tax cash inflow relevant to Calamity Cauliflower's disposal of the old equipment is

A$9,600

B$8,000

C$6,400

D$1,600

Answer : A

The relevant after-tax cash inflow consists of the proceeds on the disposal ($8.000) plus the tax benefit ($1,600).

Question 4

Calamity Cauliflower Corporation is considering undertaking a capital project. The company would have to commit $24,000 of working capital in addition to an immediate outlay of $160,000 for new equipment. The project is expected to generate $100,000 of annual income for 10 years. At the end of that time, the new equipment, witch will be depreciated on a straight-line basis, is expected to have a salvage value of $10,000. The existing equipment that would be sold to make room for the project has a histoncal cost of $220,000 and accumulated depreciation of $208,000. It has an estimated remaining useful life of 2 years and the remaining book value is being depreciated on a straight-line basis. A scrap dealer has agreed to buy it for $8,000. The company's effective tax rate is 40%. Calamity Cauliflower's tax benefit arising from the disposal of the old equipment is

A$8,000

B$4,800

C$3,200

D$1,600

Answer : D

A firm enjoys a tax benefit upon recognizing a loss on disposal because the loss reduces book income. The old equipments book value is historical cost ($220,000) minus accumulated depreciation ($208,000).

The tax benefit is the accrual-basis loss on the disposal times the effective tax rate.

Question 5

Post-investment audits?

AComplete a stage in the capital budgeting process.

BSieve as a control mechanism.

CAllow the outcome of a project to be evaluated as soon as possible

DDeter managers from proposing profitable investments

Answer : B

Post-investment audits should be conducted to serve as a control mechanism and to deter managers from proposing unprofitable investments. Actual-to-expected cash flow comparisons should be made, and unfavorable variances should be explained. Individuals who supplied unrealistic estimates should have to explain Differences.

Question 6

Lawson. Inc. is expanding its manufacturing plant, which requires an investment of $4 million in new equipment and plant modifications. Lawson's sales are expected to increase by $3 million per year as a result of the expansion. Cash investment in current assets averages 30% of sales; accounts payable and other current liabilities are 10% of sales. What is the estimated total investment for this expansion?

A$3.4 million.

B$4.3 million.

C$4.6 million.

D$5.2 million.

Answer : C

The investment required includes increases in working capital (e.g.. additional receivables and inventories resulting from the acquisition of a new manufacturing plant). The additional working capital is an initial cost I of the investment, but one that will be recovered (i.e.. it has a salvage value equal to its initial cost). Lawson can use current liabilities to fund assets to the extent of 10% of sales. Thus, the total initial cash outlay will be $46 million ($4 million + [(30% --- 10%) x $3 million sales].

Question 7

A depreciation tax shield is?

AAn after-tax cash outflow

BA reduction in income taxes.

CThe cash provided by recording depreciation.

DThe expense caused by depreciation.

Answer : B

A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income. -

IMANET Certified Management Accountant Exam Practice Test