IMANET CMA Certified Management Accountant Exam Practice Test

Page: 1 / 14
Total 1336 questions
Question 1

The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies have submitted bids to Cliff Kraven, the postal inspector responsible for choosing a machine. A cash flow analysis of the two machines indicates the following:

It the cost of capital for the Postal Service is 8%. which of the two mail sorters should Cliff choose and why?



Answer : A

The NPV of both machines must be calculated and compared to determine which will yield a better return of cash flows. Machine A is calculated as one lump sum payable in 4 years minus the initial investment cost.

The NPV of Machine B is calculated as the present value of an ordinary annuity of

$13,000 for 4 years, minus the initial investment cost.

By comparing the NPV of both machines, Cliff would choose Machine A because NPV of A > NPV of B by $1,044.


Question 2

The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; twill cost $6,000 to transport to Moore's plant and $9,000 to install. It is seated that the machine will last 10 years. and it Es expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and 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. Moore ha a marginal tax rate of 40%. What is the net cash flow for the third year that Moore Corporation should use in a capital budgeting analysis?



Answer : A

The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 of variable costs), or a total of $100,000 per year. This amount will be subject to taxation, but, for the first 5 years. there will be a ''depreciation deduction of $21,000 per year ($105,000 cost divided by 5 years). Therefore, deducting the $21,000 of depreciation expense from the $ 100.000 of contribution margin will result in taxable income of $79,000. After income taxes of $31,600 ($79,000 x 40%), the net cash flow in the third year is $68,400 ($100,000 - $31,600).


Question 3

The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to insall. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,0O0 Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and 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. Moore has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?



Answer : D

Initially, the company must invest $105,000 in the machine. Consisting of the invoice price of $90 00. the delivery costs of $6,000, and the installation costs of $9,000.


Question 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?



Answer : B

The project will have an $11,000 before-tax cash inflow from operations in the tenth year ($40,000 --- $29,000). Also, $9,000 will be generated from the sale of the equipment. The entire $9,000 will be taxable because the basis of the asset was reduced to zero in the 7th year. Thus, taxable income will be $20,000 ($11,000 + $9,000), leaving a net after-tax cash inflow of $12,000 [$20.000 x (1.0--- .4)] To this $12,000 must be added the $12,000 tied up in working capital ($7,000 + $5,000). The total net cash flow in the 10th year will therefore be $24.O0j


Question 5

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. Regale's net cash investment at the time of purchase if the old gander is sold and the new one purchased is



Answer : C

The old machine has a carrying amount of $10,000 [$15,000 cost---S ($15,000 cost +15 years) depreciation]. The loss on the sale is $4,000 ($10,000--- $6,000 cash received), and the tax savings from the loss is $1,600 ($4,000 x 40%). Thus, total inflows are $7,600 The only outflow is the $25,000 purchase price of the new machine. The net cash investment is therefore $17,400 ($25,000--- $7,600).


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?



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?



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. -


Page:    1 / 14   
Total 1336 questions