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Financial CMA Exam
Certified Management Accountant (Page 11 )

Updated On: 1-Feb-2026
Page 11 of 270
PDF with 1336 Questions
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The prospect for the long-term profitability of an existing firm is greater when

  1. The firm operates in an industry with a steep learning curve in its production process
  2. The costs of switching suppliers is low
  3. New entrants are encouraged by government policy
  4. Distribution channels are willing to accept new products

Answer(s): A

Explanation:

The prospects of long-term profitability are contingent upon the industry's exit and entry barriers. The entry of new firms in market decreases the prospect for long-term profitability. When a firm operates in an industry that has a steep learning curve, it ios more difficult for new firms to enter the market. Thus, the prospects of long-term profitability are greater for an existing firm.



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The length of time required to recover the initial cash outlay of a capital project is determined by using the

  1. Discounted cash flow method.
  2. Payback method.
  3. Weighted net present value method.
  4. Net present value method.

Answer(s): B

Explanation:

The payback method measures the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment by the average expected cash inflows to be generated, resulting in the number of years required to recover the original investment. The payback method gives no consideration to the time value of money, and there is no consideration of returns after the payback period.



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Jasper Company has a payback goal of 3 years on new equipment acquisitions. A new sorter is being evaluated that costs $450,000 and has a 5-year life. Straight-line depreciation will be used; no salvage is anticipated. Jasper is subject to a 40% income tax rate. To meet the company's payback goal, the sorter must generate reductions in annual cash operating costs of

  1. $60,000
  2. $100,000
  3. $150,000
  4. $190,000

Answer(s): D

Explanation:

Given a periodic constant cash flow, the payback period is calculated by dividing cost by the annual cash inflows, or cash savings. To achieve a payback period of 3 years, the annual increment in net cash inflow generated by the investment must be $150,000 ($450,000 ÷ 3-year targeted payback period). This amount equals the total reduction in cash operating costs minus related taxes. Depreciation is $90,000 ($450,000 ÷ 5 years). Because depreciation is a noncash deductible expense, it shields $90,000 of the cash savings from taxation. Accordingly, $60,000 ($150,000 -- $90,000) of the additional net cash inflow must come from after-tax net income. At a 40% tax rate, $60,000 of after-tax income equals $100,000 ($60,000 ÷ 60%) of pre4ax income from cost savings, and the out flow for taxes is $40,000. Thus, the annual reduction in cash operating costs required is $190,000 ($150,000 additional net cash inflow required + $40,000 tax outflow).



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A characteristic of the payback method (before taxes) is that it

  1. Incorporates the time value of money.
  2. Neglects total project profitability'.
  3. Uses accrual accounting inflows in the numerator of the calculation.
  4. Uses the estimated expected life of the asset in the denominator of the calculation.

Answer(s): B

Explanation:

The payback method calculates the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment required by the average expected cash, 1flow to be generated, resulting in the number of years required to recover the original investment. Payback is easy to `calculate but has two principal problems: it ignores the time value of money, and it gives no consideration to returns, after the payback period. Thus, it ignores total project profitability'.



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lrwinn Co. is considering an investment in a capital project. The sole outlay will be $800,000 at the outset of the project and the annual net after-tax cash inflow will be $216,309.75 for 6 years. The present value factors at lrwinn's 8% cost 01 capital are


What is the breakeven time (BET)?

  1. 3.70 years.
  2. 4.57 years.
  3. 5.O0years.
  4. 6.O0years.

Answer(s): B

Explanation:

Breakeven time is a more sophisticated version of the payback method. Breakeven time is `defined as the period required for the discounted cumulative cash inflows on a project to equal the discounted cumulative cash outflows (usually the initial cost). Thus, it is the time necessary for the present value of the discounted cash flows to equal zero. This period begins at the outset of a project, not when the initial cash outflow occurs.
Accordingly, the BET is calculated as follows:



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