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Free CMA Exam Braindumps (page: 65)

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Flex Corporation is studying a capital acquisition proposal in which newly acquired assets will be depreciated using the straight-line method. Which one of the following statements about the proposal would be incorrect if a switch is made to the Modified Accelerated Cost Recovery System (MACRS)?

  1. The net present value will increase.
  2. The internal rate of return will increase.
  3. The payback period will be shortened.
  4. The profitability index will decrease.

Answer(s): D

Explanation:

MACPS is an accelerated method of depreciation under which depreciation expense will be greater during the early years of an asset's life. Thus, the outflows for income taxes will be less in the early years, but greater in the later years1 and the NPV (present value of net cash inflows -- investment) will be increased. The profitability index (present value of net cash inflows ÷ the investment) must increase if the NPV increases.



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Capital Invest, Inc. 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 Capital Invest, Inc. undertake during the upcoming year assuming it has no budget restrictions?

  1. All of the projects.
  2. Projects 1, 2, and 3.
  3. Projects 2, 3,and 4.
  4. Projects 1, 3, and 4.

Answer(s): C

Explanation:

A company using the NPV method should undertake all projects with a positive NPV, unless some of those projects are mutually exclusive. Given that Projects 2, 3, and 4 have positive NPVs, they should be undertaken. Project 1 has a negative NPV.



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Capital Invest, Inc. 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 Capital Invest, Inc. undertake during the upcoming year if it has only $600,000 of funds available?

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

Answer(s): D

Explanation:

Given that only $600,000 is available and that each project costs $200,000 or more, no more than two projects can be undertaken. Because Projects 3 and 4 have the greatest NPVs, profitability indexes, and IRRs, they are the projects in which the company should invest.



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Capital Invest, Inc. 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 Capital Invest, Inc. undertake during the upcoming year if it has only $300,000 of capital funds available?

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

Answer(s): D

Explanation:

Given that $300,000 is available and that each project costs $200,000 or more, only one project can be undertaken. Because Project 3 has a positive NPV and the highest profitability index, it is the best investment. The high profitability index means that the company will achieve the highest NPV per dollar of investment with Project 3. The profitability index facilitates comparison of different-sized investments.






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