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Financial CMA Exam
Certified Management Accountant (Page 25 )

Updated On: 25-Jan-2026
Page 25 of 270
PDF with 1336 Questions
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Suzie owns a computer reselling business and is expanding it. She is presented with two options. Under Proposal A, the estimated investment for the expansion project is $85,000, and it is expected to produce after--tax cash flows of $25,000 for each of the next 6 years. Proposal B involves an investment of $32,000 and after-tax cash flows of $10,000 for each of the next 6 years. Between which two desired rates of return will Suzie be indifferent to either proposal?

  1. 10%andl2%.
  2. 14%andl6%.
  3. 16%andl8%.
  4. 18%and2o%.

Answer(s): C

Explanation:

The desired rate of return at which the two projects will produce the same NPV can be found by calculating the IRR of the difference in cash flows between the two projects. Proposal A requires an additional investment of $53,000 and generates extra cash flows of $15,000 for 6 years. Dividing the incremental investment by the annual cash flows yields a result of 3.533 ($53,000 + $15000). In other words, this is the present value factor necessary to make the cash flows equal the incremental investment. Consulting the present value table for an ordinary annuity for 6 years reveals that 3.533 is somewhere between 16% and 18%.



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The following data pertain to a 4-year project being considered by Metro Industries:
· A depreciable asset that costs $1 .200.000 will be acquired on January 1. The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property under the Modified Accelerated Cost Recovery System (MACPS). · 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.
· 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. · 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 analwe investments and will employ the following factors and rates.


The discounted, net-of-tax amount that relates to disposal of the existing asset is

  1. $168,000
  2. $169,320
  3. $180,000
  4. $190,680

Answer(s): B

Explanation:

The cash in flow from the existing asset is $180,000, but that amount is subject to tax on the $30,000 gain ($180,000-- $150,000 tax basis). The tax on the gain is $12,000 ($30,000 x 40%). Because the tax will not be paid until year-end1 the discounted value is $10,680 ($12,000 x .89 PV of $1 at 12% for one period). Thus, the net-of-tax inflow is $169,320 ($180,000--$10,680). NOTE: This as set was probably a Section 1231 asset, and any gain on sale qualifies for the special capital gain tax rates. Had the problem not stipulated a 40% tax rate, the capital gains rate would be used. An answer based on that rate is not among the options.



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The following data pertain to a 4-year project being considered by Metro Industries: · A depreciable as set that costs $1, 200,000 will be acquired on January 1 . The asset, which is expected to have a $200,000 salvage value at the end of 4 years, qualifies as 3- year property' under the Modified Accelerated Cost Recovery System (MACPS). · 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.
· 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. · 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.



The discounted cash flow for the fourth year MACPS depreciation on the new asset is

  1. $0
  2. $17,920
  3. $21,504
  4. $26,880

Answer(s): C

Explanation:

Tax law allows taxpayers to ignore salvage value when calculating depreciation under MACPS. Thus1 the depreciation deduction is 7% of the initial $1 .200000 cost, or $84,000. Ata4O% tax rate, the deduction will save the company $33,600 in taxes in the fourth year. The present value of this savings is $21,504 ($33,600 x 0.64 present value of $1 at 12% for four periods).



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Following are the operating results of the two segments of Parklin Corporation.


Fixed costs of goods sold are allocated to each segment based on the number of employees. Fixed selling and administrative expenses are allocated equally. If Segment B is eliminated, $1 .500 of fixed costs of goods sold would be eliminated. Assuming Segment B is closed, the effect on operating income would be a(n)

  1. Increase of $500.
  2. Increase of $2,000.
  3. Decrease of $2,000.
  4. Decrease of $2500.

Answer(s): C

Explanation:

The effect of closing Segment B on Parklin's operating income can be calculated as follows:



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McCann Company can manufacture one of two special orders with their existing capacity. Special Order A is for 100,000 units and Special Order B is for 200,000 units.
Cost and revenue data per unit are as follows:


Based on the above information, which one of the following statements correctly identifies the effect on pretax profit if the optimal decision is made?

  1. $200 increase if Special Order A is taken.
  2. $9,200 increase if Special Order A is taken.
  3. $13,430 increase if Special Order A is taken.
  4. $8,040 increase if Special Order B is taken.

Answer(s): B

Explanation:

The effect on pretax profit of producing the two special orders can be calculated as follows:



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