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Financial CMA Exam
Certified Management Accountant (Page 15 )

Updated On: 1-Feb-2026
Page 15 of 270
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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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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Jorelle Company's financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return.



The traditional payback period for the investment proposal is

  1. Over5years.
  2. 2.23 years.
  3. 1.65 years.
  4. 2.83 years.

Answer(s): B

Explanation:

The traditional payback period is the number of periods required for the undiscounted expected cash flows to equal the original investment. When periodic cash flows are not expected to be uniform, a cumulative calculation is necessary. The first year's cashing flow is $120,000. Adding another $108,000 in Year 2 brings the total payback after 2 years to $228,000. Accordingly, the traditional payback period is about 2.23 years {2 + [($250,000 - $228,000) + $96,000 cash inflow in year 3}}



View Related Case Study

Jorelle Company financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year.. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return.


The net present value for the investment proposal is

  1. $106,160
  2. $(97,970)
  3. $356,160
  4. $96,560

Answer(s): A

Explanation:

The NPV is the sum of the present values of all cash inflows and outflows associated with the proposal. If the NPV is positive, the proposal should be accepted. The NPV is determined by discounting each expected cash flow using the appropriate 12% interest factor for the present value of $1. Thus, the NPV is $106,160 [(.89 x $120,000) + (.80 x $108,000) + (.71 x $96,000) + (.64 x $84,000) + (.57 x $72,000) --(1.00 x $250,000)].



View Related Case Study

Jorelle Company's financial staff has been requested to review a proposed investment in new capital equipment. Applicable financial data is presented below. There will be no salvage value at the end of the investment's life and, due to realistic depreciation practices, it is estimated that the salvage value and net book value are equal at the end of each year. All cash flows are assumed to take place at the end of each year. For investment proposals, Jorelle uses a 12% after-tax target rate of return.


The accounting rate of return on the average investment proposal is

  1. 12.0%
  2. 17.2%
  3. 28.0%
  4. 34.4%

Answer(s): D

Explanation:

The accounting rate of return (unadjusted rate of return or book value rate of return) equals accounting net income divided by the required average investment. The accounting rate of return ignores the time value of money. The average income over 5 years is $43,000 per year [($35000 + $39,000 + $43000 + $47,000 + $51,000) ÷ 5]. Hence, the accounting rate of return is 34.4% [$43,000 ($250,000 ÷ 2)].



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