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Free Financial CMA Exam Braindumps (page: 63)

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Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year


Which projects should Maloney undertake during the upcoming year if it has only $12,000,000 of investment funds available?

  1. Projects 1 and 3.
  2. Projects 1, 2, and 4.
  3. Projects 1 and 4.
  4. Projects 1 and 2.

Answer(s): D

Explanation:

With only $12,000,000 available and each project costing $4,000,000 or more, no more than two projects can be undertaken. Accordingly, projects should be selected because they have the greatest NPVs and profitability lily indexes.



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Maloney Company uses a 12% hurdle rate for all capital expenditures and has done the following analysis for four projects for the upcoming year


Which project(s) should Maloney undertake during the upcoming year if it has only $6,000,000 of funds available?

  1. Project 3.
  2. Projects 1 and 2.
  3. Project 1.
  4. Project 2.

Answer(s): C

Explanation:

With only $6,000,000 available and each project costing $4,000,000 or more, no more than one project can be undertaken. Project 1 should be chosen because it has a positive NPV and the highest profitability index. The high profitability index means that the company will achieve the highest NPV per dollar of investment with Project 1.The profitability index facilitates comparison of different-sized investments.



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Mercken Industries is contemplating four projects, Project P, Project Q, Project P, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%.


During this year, Mercken will choose

  1. Projects P, 0, and P.
  2. Projects P, Q, R, and S.
  3. Projects Q and R.
  4. Projects P and Q.

Answer(s): C

Explanation:

Only two of the projects can be selected because three would require more than $450,000 of capital. Project S can immediately be dismissed because it has a negative net present value (NPV). Using the NPV and the profitability index methods, the best investments appear to be 0 and P. The internal rate of return (IPP) method indicates that P is preferable to P. However, it assumes reinvestment of funds during Years 4 and 5 at the lRR (18.7%). Given that reinvestment will be at a rate of at most 12%, the IPP decision criterion appears to be unsound in this situation.



View Related Case Study

Mercken Industries is contemplating four projects, Project P, Project Q, Project P, and Project S. The capital costs and estimated after-tax net cash flows of each mutually exclusive project are listed below. Mercken's desired after-tax opportunity cost is 12%, and the company has a capital budget for the year of $450,000. Idle funds cannot be reinvested at greater than 12%.


If Mercken is able to accept only one project, the company would choose

  1. Project P.
  2. Project 0 because it has the highest net present value.
  3. Project P because it has the highest internal rate of return.
  4. Project P because it has the shortest payback period.

Answer(s): B

Explanation:

Because unused funds cannot be invested at a rate greater than 12%, the company should select the investment with the highest net present value. Project Q is preferable to P because its return on the incremental $45000 invested ($235,000 cost of Q--$190,000 cost of P) is greater than 12%.






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