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Free CMA Exam Braindumps (page: 54)

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In equipment-replacement decisions1 which one of the following does not affect the decision-making process?

  1. Current disposal price of the old equipment.
  2. Operating costs of the old equipment.
  3. Original fair market value of the old equipment.
  4. Cost of the new equipment.

Answer(s): C

Explanation:

All relevant costs should be considered when evaluating an equipment-replacement decision. These include the cost of the new equipment1 the disposal price of the old equipment, and the operating costs of the old equipment versus the operating costs of the new equipment. The original cost or fair market value of the old equipment is a sunk cost and is irrelevant to future decisions.



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The term that refers to costs incurred in the past that are not relevant to a future decision is

  1. Discretionary cost.
  2. Pull absorption cost.
  3. Under allocated indirect cost.
  4. Sunk cost.

Answer(s): D

Explanation:

A sunk cost cannot be avoided because it represents an expenditure that has already been made or an irrevocable decision to incur the cost.



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Which one of the following statements concerning cash flow determination for capital budgeting purposes is not correct?

  1. Tax depreciation must be considered because it affects cash payments for taxes.
  2. Book depreciation is relevant because it affects net income.
  3. Sunk costs are not incremental flows and should not be included.
  4. Networking capital changes should be included in cash flow forecasts.

Answer(s): B

Explanation:

Tax depreciation is relevant to cash flow analysis because it affects the amount of income taxes that must be paid. However, book depreciation is not relevant because it does not affect the amount of cash generated by an investment.



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A depreciation tax shield is

  1. An after-tax cash outflow.
  2. A reduction in income taxes.
  3. The cash provided by recording depreciation.
  4. The expense caused by depreciation.

Answer(s): B

Explanation:

A tax shield is something that will protect income against taxation. Thus, a depreciation tax shield is a reduction in income taxes due to a company's being allowed to deduct depreciation against otherwise taxable income.






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