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Free CMA Exam Braindumps (page: 28)

Page 28 of 336
PDF with 1336 Questions
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The payback reciprocal can be used to approximate a project's

  1. Profitability' index.
  2. Net present value.
  3. Accounting rate of return if the cash flow pattern is relatively stable.
  4. Internal rate of return if the cash flow pattern is relatively stable.

Answer(s): D

Explanation:

The payback reciprocal (1 + payback) has been shown to approximate the internal rate of return' (IRR) when the periodic cash flows are equal and the life of the project is at least twice the payback period:



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The bailout payback method

  1. Incorporates the time value of money.
  2. Equals the recovery period from normal operations.
  3. Eliminates the disposal value from the payback calculation.
  4. Measures the risk if a project is terminated.

Answer(s): D

Explanation:

The payback period equals the net investment divided by the average expected cash flow, resulting in the number of years required to recover the original investment. The bailout payback incorporates the salvage value of the asset into the calculation. It determines the length of the payback period when the periodic cash inflows are combined with the salvage value. Hence, the method measures risk. The longer the payback period, the more risks' the investment.



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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 Pjpe, 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

  1. $90,000
  2. $110,000
  3. $114,000
  4. $150,000

Answer(s): B

Explanation:

Payback is the number of years required to complete the return of the original Investment. Given a periodic constant cash flow, the payback period equals net investment divided by the constant expected periodic after-tax cash flow. The desired payback period is 4 years, so the constant after-tax annual cash flow must be $90,000 ($360,000 + 4). Assuming that the company has sufficient other income to permit realization of the full tax savings, depreciation of the machine will shield $60,000 ($360,000 + 6) of income from taxation each year, an after-tax cash savings of $24,000 ($60,000 x 40%). Thus, the machine must generate an additional $66,000 ($90,000 -- $24,000) of after-tax cash %avings from operations. This amount is equivalent to $110,000 [$66,000 + (1.0-- .4)] of before-tax operating cash savings.



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The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickenss' 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. Further more, the machine is expected to produce 4,000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Eederal 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%. What is the approximate payback period on Dickins' new machine?

  1. 1.05years.
  2. 1.S4years.
  3. 1.33years.
  4. 2.22 years.

Answer(s): B

Explanation:

When annual cash inflows are uniform, the payback period is calculated by dividing the initial investment ($210,000) by the annual net cash inflows ($136,800). Dividing $210,000 by $136,800 produces a payback period of 1.54 years.



Page 28 of 336



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