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Free CMA Exam Braindumps (page: 60)

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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 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 before4ax 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 years1 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 ($360000 ÷ 6) of income from taxation each year, an after-tax cash savings of $24000 ($60,000 x 40%). Thus, the machine must generate an additional $66,000 ($90,000 -- $24,000) of after-tax cash savings from operations. This amount is equivalent to $1 10,000 [$66,000 ÷ (1 .0 -- .4)] of before-tax operating cash savings.



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Which one of the following planning techniques is most likely to be used to determine which business units will receive additional capital and which will be divested?

  1. Competitive strategies model.
  2. Portfolio matrix analysis.
  3. Scenario development.
  4. Situational analysis.

Answer(s): B

Explanation:

Business units may be treated as elements of an investment portfolio. A portfolio should be efficient in balancing the risk with the rate of return on the portfolio. The expected rate of return of a portfolio is the weighted average of the expected returns of the individual assets in the portfolio. The variability (risk) of a portfolio's return is determined by the correlation of the returns of individual portfolio assets. To the extent the returns are not perfectly positively correlated, variability is decreased. Thus, business units should be selected that increase returns and diversify and reduce risk.



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Barker, Inc. has no capital rationing constraint and is analyzing many independent investment alternatives. Barker should accept all investment proposals

  1. If debt financing is available for them.
  2. That have positive cash flows.
  3. That provide returns greater than the before-tax cost of debt.
  4. That have a positive net present value.

Answer(s): D

Explanation:

A company should accept any investment proposal, unless some are mutually exclusive, that has a positive net present value or an internal rate of return greater than the company's desired rate of return.



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The profitability index approach to investment analysis

  1. Fails to consider the timing of project cash flows.
  2. Considers only the project's contribution to net income and does not consider cash flow effects.
  3. Always yields the same accept/reject decisions for independent projects as the net present value method.
  4. Always yields the same accept/reject decisions for mutually exclusive projects as the net present value method.

Answer(s): C

Explanation:

The profitability index is the ratio of the present value of future net cash inflows to the initial net cash investment. It is a variation of the net present value (NPV) method and facilitates the comparison of different-sized investments. Because it is based on the NPV method, the profitability index will yield the same decision as the NPV for independent projects. However, decisions may differ for mutually exclusive projects of different sizes.






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