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Free CMA Exam Braindumps (page: 14)

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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 analyze investments and will employ the following factors and rates.


The expected incremental sales will provide a discounted, net-of-tax contribution margin over 4 years of

  1. $57,600
  2. $92,160
  3. $273,600
  4. $437,760

Answer(s): D

Explanation:

Additional annual sales are 30,000 units at $20 per unit. If variable costs are expected to be $12 per unit, the unit contribution margin is $8, and the total before-tax annual contribution margin is $240,000 (30,000 units x $8). The after-tax total annual contribution margin is $144,000 [$240,000 x (1 .0-- 4)]. This annual increase in the contribution margin should be treated as an annuity. Thus, its present value is $437,760 ($144,000 x 3.04 PV of an annuity of $1 at 12% for four periods).



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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 analyze investments and will employ the following factors and rates.


4. The overall discounted-cash-flow impact of the working capital investment on Metro's project is

  1. $(2,800)
  2. $(18,000)
  3. $(50,000)
  4. $(59,200)

Answer(s): B

Explanation:

The working capital investment is treated as a $50,000 outflow at the beginning of the project and a $50,000 inflow at the end of 4 years. Accordingly, the present value of the inflow after 4 years should be subtracted from the initial $50,000 outlay. The overall discounted-cash4low impact of the working capital investment is $18,000 [$50,000-- ($50,000 x .64 PV of $1 at 12% for four periods)].



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5. The net present value (NPV) method of investment project analysis assumes that the project's cash flows are reinvested at the

  1. Computed internal rate of return.
  2. Risk4ree interest rate.
  3. Discount rate used in the NPV calculation.
  4. Firm's accounting rate of return.

Answer(s): C

Explanation:

The NPV method is used when the discount rate is specified. It assumes that cash flows from the investment can be reinvested at the particular project's discount rate.



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6. The rankings of mutually exclusive investments determined using the internal rate of return method (IRR) and the net present value method (NPV) may be different when

  1. The lives of the multiple projects are equal and the size of the required investments is equal.
  2. The required rate of return equals the IRR of each project.
  3. The required rate of return is higher than the IRR of each project.
  4. Multiple projects have unequal lives and the size of the investment for each project is different.

Answer(s): D

Explanation:

The two methods ordinarily yield the same results, but differences can occur when the duration of the projects and the initial investments differ. The reason is that the IRR method assumes cash inflows from the early years will be reinvested at the internal rate of return. The NPV method assumes that early cash inflows are reinvested at the NPV discount rate.






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