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Free CMA Exam Braindumps (page: 57)

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PDF with 1336 Questions
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The internal rate of return for a project can be determined

  1. If the internal rate of return is greater than the firm's cost of capital.
  2. Only if the project cash flows are constant.
  3. By finding the discount rate that yields a net present value of zero for the project.
  4. By subtracting the firm's cost of capital from the project's profitability index.

Answer(s): C

Explanation:

The IRR is a capital budgeting technique that calculates the interest rate that yields a net present value equal to $0. It is the interest rate that will discount the future cash flows to an amount equal to the initial cost of the project. Thus, the higher the PR, the more favorable the ranking of the project.



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Carco, Inc. wants to use discounted cash flow techniques when analyzing its capital investment projects. The company is aware of the uncertainly involved in estimating future cash flows. A simple method some companies employ to adjust for the uncertainly inherent in their estimates is to

  1. Prepare a direct analysis of the probability of outcomes.
  2. Use accelerated depreciation.
  3. Adjust the minimum desired rate of return.
  4. Increase the estimates of the cash flows.

Answer(s): C

Explanation:

Uncertainly can be compensated for by adjusting the desired rate of return. If projects have relatively uncertain returns, a higher rate should be required. A lower rate of return may be acceptable given greater certainly. The concept is that with increased risk should come increased rewards1 i.e., a higher rate of return.



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The accountant of Ronier, Inc. has prepared an analysis of a proposed capital project using discounted cash flow techniques. One manager has questioned the accuracy of the results because the discount factors employed in the analysis have assumed the cash flows occurred at the end of the year when the cash flows actually occurred uniformly throughout each year. The net present value calculated by the accountant will

  1. Not be in error.
  2. Be slightly overstated.
  3. Be unusable for actual decision making.
  4. Be slightly understated but usable.

Answer(s): D

Explanation:

The effect of assuming cash flows occur at the end of the year simply understates the present values of the future cash flows, in reality, they probably occur on the average at mid-year.



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High-Tech Industries is considering the acquisition of a new state-of-the-art manufacturing machine to replace a less efficient machine. Hi-Tech has completed a net present value analysis and found it to be favorable. Which one of the following factors should not be of concern to Hi-Tech in its acquisition considerations?

  1. The availability of any necessary financing.
  2. The probability of near-term technological changes to the manufacturing process.
  3. The investment tax credit.
  4. Maintenance requirements, warranties, and availability of service arrangements.

Answer(s): C

Explanation:

The investment tax credit is of no concern because it no longer exists. The 1986 Tax Reform Act eliminated the investment tax credit.






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