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Financial CMA Exam
Certified Management Accountant (Page 19 )

Updated On: 1-Feb-2026
Page 19 of 270
PDF with 1336 Questions
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The use of an accelerated method instead of the straight-line method of depreciation in computing the net present value of a project has the effect of

  1. Raising the hurdle rate necessary to justify the project.
  2. Lowering the net present value of the project.
  3. Increasing the present value of the depreciation tax shield.
  4. Increasing the cash outflows at the initial point of the project.

Answer(s): C

Explanation:

Accelerated depreciation results in greater depreciation in the early years of an asset's life compared with the straight-line method. Thus, accelerated depreciation results in lower income tax expense in the early years of a project and higher income tax expense in the later years. By effectively deferring taxes, the accelerated method increases the present value of the depreciation tax shield.



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All of the following items are included in discounted cash flow analysis except

  1. Future operating cash savings.
  2. The current asset disposal price.
  3. The future asset depreciation expense.
  4. The tax effects of future asset depreciation.

Answer(s): C

Explanation:

Discounted cash flow analysis, using either the internal rate of return (IRR) or the net present value (NPV) method, is based on the time value of cash inflows and outflows. All future operating cash savings are considered, as well as the tax effects on cash flows of future depreciation charges. The cash proceeds of future asset disposals are likewise a necessary consideration. Depreciation expense is a consideration only to the extent that it affects the cash flows for taxes. Otherwise, depreciation is excluded from the analysis because it is a noncash expense.



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Amstar Corporation has not yet decided on its hurdle rate for use in the evaluation of capital budgeting projects. This lack of information will prohibit Amstar from calculating a project's

  1. Option
  2. Option
  3. Option
  4. Option

Answer(s): D

Explanation:

A hurdle rate is not necessary in calculating the accounting rate of return. That return is calculated by dividing the net income from a project by the investment in the project. Similarly, a company can calculate the internal rate of return (IRR) without knowing its hurdle rate. The IRR is the discount rate at which the net present value is $0. However, the NPV cannot be calculated without knowing the company's hurdle rate. The NPV method requires that future cash flows be discounted using the hurdle rate.



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A firm with an 18% desired rate of return is considering the following projects (on January 1, Year 1):


Project B's internal rate of return is closest to

  1. 15%
  2. 16%
  3. 18%
  4. 20%

Answer(s): D

Explanation:

The internal rate of return is the discount rate at which the NPV is zero. Consequently, the cash outflow equals the present value of the inflow at the internal rate of return. The present value of $1 factor for Project B's internal rate of return is therefore 4020 ($4,000,000 cash outflow ÷ $9,950,000 cash inflow). This factor is closest to the present value of $1 for5 periods at 20%.



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A firm with an 18% desired rate of return is considering the following projects (on January 1 1Year 1):

Using the net-present-value (NPV) method, Project A's net present value is

  1. $316,920
  2. $23,140
  3. $(265,460)
  4. $(316,920)

Answer(s): C

Explanation:

The cash inflow occurs 5 years after the cash outflow, and the NPV method uses the firm's desired rate of return of 18%. The present value of $1 due at the end of 5 years discounted at 18% is .4371. Thus, the NPV of Project A is $(265,460) [($7,400,000 cash inflow x 4371) --$3,500,000 cash outflow].



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