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IIA CIA Exam
Certified Internal Auditor Exam (Page 32 )

Updated On: 12-Jan-2026
Page 32 of 342
PDF with 1702 Questions

A characteristic of the payback method before taxes) is that it

  1. Incorporates the time value of money.
  2. Neglects total project profitability.
  3. Uses accrual accounting inflows in the numerator of the calculation.
  4. Uses the estimated expected life of the asset in the denominator of the calculation.

Answer(s): B

Explanation:

The, payback method calculates the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment required by the average expected cash flow to he generated, resulting in the number of years required to recover the original investment. Payback is easy to calculate but has two principal problems: it ignores the time value of money, and it gives no consider t, -, n to returns after the payback period. Thus, it ignores total project profitability.



When evaluating projects. breakeven time is best described as

  1. Annual fixed costs - monthly contribution margin.
  2. Project investment - annual net cash inflows.
  3. The point where cumulative cash inflows on a project equal total cash outflows.
  4. The point at which discounted cumulative cash inflows on a project equal discounted total cash outflows.

Answer(s): D

Explanation:

Breakeven time is a capital budgeting tool that is widely used to evaluate the rapidity of new product development. It is the period required for the discounted cumulative cash inflows for a project to equal the discounted cumulative cash outflows. The concept is similar to the payback period, but it is more sophisticated because it incorporates the time
value of money. It also differs from the payback method because the period covered begins at the outset of a project, not when the initial cash outflow occurs.



The capital budgeting model that is generally considered the best model for long-range decision making is the

  1. Payback model.
  2. Accounting rate of return model.
  3. Unadjusted rate of return model_
  4. Discounted cash flow model.

Answer(s): D

Explanation:

The capital budgeting methods that are generally considered the best for long-range decision making are the internal rate of return and net present value methods. These are both discounted cash flow methods.



Project B's internal rate of return is closest to

  1. 15%
  2. 18%
  3. 20%
  4. 22%

Answer(s): C

Explanation:

Twenty percent is the rate of return that equates the cash inflows with the cash outflows. The present value of 20% for 5 years is .4019, which multiplied by US $9, 950, 000 equals US $3, 998, 905. Therefore, the net present value of the project approximates 0 using the 20% rate.



Using the net present value method, project A's net present value is

  1. US $ 316, 920)
  2. US $ 265, 460)
  3. US $0
  4. US $316, 920

Answer(s): B

Explanation:

The cash flow at December 31 of Year 5 is 5 years from the present cash outflow, and the net present value method uses the firm's cost of capital of 18%. The present value factor for 18% for 5 years is .4371, and US $7, 400, 000 multiplied by .4371 equals US $3, 234, 540, which is US $265, 460 less than the present cash outflow of US $3, 500, 000.



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