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Financial CMA Exam
Certified Management Accountant (Page 13 )

Updated On: 1-Feb-2026
Page 13 of 270
PDF with 1336 Questions
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Henderson, Inc. has purchased a new fleet of trucks to deliver its merchandise. The trucks have a useful life of 8 years and cost a total of $500.000. Henderson expects its net increase in after-tax cash flow to be $150,000 in Year 1, $175,000 in Year 2, $125,000 in Year 3, and $100,000 in each of the remaining years. Ignoring the time value of money, how long will it take Henderson to recover the amount of investment?

  1. 3.5 years.
  2. 4.0 years.
  3. 4.2 years.
  4. 5 years.

Answer(s): A

Explanation:

The payback period for an investment, ignoring the time value of money, can be found by accumulating each year's net cash flows until the initial investment is recovered. The amount accumulated after 3 years is $450,000. Thus, 50% ofYear4 cash flows is needed to recover the initial investment. The payback period is 3.5 years.



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Depreciation is incorporated explicitly in the discounted cash flow analysis of an investment proposal because it

  1. Is a cost of operations that cannot be avoided?
  2. Is a cash inflow.
  3. Reduces the cash outlay for income taxes.
  4. Represents the initial cash outflow spread over the life of the investment.

Answer(s): C

Explanation:

Depreciation is a noncash expense that is deductible for federal income tax purposes. Hence, it directly reduces the cash outlay for income taxes and is explicitly incorporated in the capital budgeting model.



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A company is considering two mutually exclusive projects with the following projected cash flows:



The company has a required rate of return of 8%. If the company's objective is to maximize shareholder wealth, which one of the following is the most valid reason for selecting one of the projects?

  1. The net present value of Project A is greater than the net present value of Project B, therefore select Project
  2. The net present value of Project A is less than the net present value of Project B, therefore select Project
  3. The internal rate of return of Project A is greater than the internal rate of return of Project B, therefore select Project A.
  4. The internal rate of return of Project A is less than the internal rate of return of Project B, therefore select Project B.

Answer(s): A

Explanation:

Project A has a single cash inflow, calculated as the present value of a single payment in 4 years discounted at 8%:


The net present value of Project A is thus greater than that of Project B.



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50. Brown and Company uses the internal rate of return (IRR) method to evaluate capital projects. Brown is considering four independent projects with the following lRRs:


Brown's cost of capital is 13%. Which one of the following project options should Brown accept based on IRR?

  1. Projects I and II only.
  2. Projects Ill and IV only.
  3. Project IV only.
  4. Projects I, II, Ill and IV.

Answer(s): B

Explanation:

When sufficient funds are available, any capital project whose internal rate of return (IRR) exceeds the company cost of capital should be accepted.



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Benet, Inc. uses the net present value method to evaluate capital projects. Bonnet's required rate of return is 10%. Benet is considering two mutually exclusive projects for its manufacturing business. Both projects require an initial outlay of $120,000 and are expected to have a useful life of four years. The projected after-tax cash flows associated with these projects are as follows:


Assuming adequate funds are available, which of the following project options would you recommend that Bennet's management undertake?

  1. Project X only.
  2. Project Y only.
  3. Projects X and Y.
  4. Neither project.

Answer(s): A

Explanation:

The net present value of Project X can be determined using the present value factor for an annually (3.170) because the cash flows are even over the life of the project. An ordinarqannuilyof$401000 discounted at 10% for the next four years has a present value of $1 26800. The cash inflows of Project Y are uneven and so must be discounted with individual factors for each of the four years as follows:


Since the projects are mutually exclusive, the one with the higher net present value is the correct choice.



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