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IMANET CMA Exam Questions
- Topic 1: External Financial Reporting Decisions/ Financial Statement Analysis
- Topic 2: Technology and Analytics/ Professional Ethics/ Internal Controls
- Topic 3: Financial Planning, Performance, and Analytics
- Topic 4: Strategic Financial Management/ Performance Management
- Topic 5: Planning, Budgeting, and Forecasting/ Investment Decisions
- Topic 6: Decision Analysis/ Risk Management/ Cost Management/ Corporate Finance
Free IMANET CMA Exam Actual Questions
Note: Premium Questions for CMA were last updated On Dec. 10, 2024 (see below)
The chief financial officer of Pauley, Inc has requested an evaluation of a proposed acquisition of a new machine at a purchase price of $60.000 and with installation costs of $10,000. A $3,000 increase in working capital will be required. The machine will have a useful life of four years. after which it can be sold for $10,000. The estimated annual incremental operating revenues and cash operating expenses are $150,000 and $100,000, respectively, for each of the four years. Pauley's effective income tax rate is 40%, and the cost of capital is 12%. Pauley uses straight-line depreciation for both financial reporting and income tax purposes. Pauley's estimated after-tax cash flow in the fourth year, at which time the equipment will be sold, will be?
The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Pauley can be calculated as follows:
Pauley's total after-tax operating cash inflow for each year of the project's life is thus $36,000 ($30,000 + $6,000). Ii the final year of the project, two additional cash flows must be taken into account, the after-tax proceeds from the disposal of the equipment purchased for the project, and the recovery of working capital devoted to the project. These two additional cash flows can be calculated as follows:
Pauley's total after-tax cash inflow for the final year of the project's life is thus $49,000
($36,000 + $13,000).
The Moore Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to Moore's plant and $9,000 to insall. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,0O0 Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. Moore has a marginal tax rate of 40%. What is the net cash outflow at the beginning of the first year that Moore Corporation should use in a capital budgeting analysis?
Initially, the company must invest $105,000 in the machine. Consisting of the invoice price of $90 00. the delivery costs of $6,000, and the installation costs of $9,000.
The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies have submitted bids to Cliff Kraven, the postal inspector responsible for choosing a machine. A cash flow analysis of the two machines indicates the following:
It the cost of capital for the Postal Service is 8%. which of the two mail sorters should Cliff choose and why?
The NPV of both machines must be calculated and compared to determine which will yield a better return of cash flows. Machine A is calculated as one lump sum payable in 4 years minus the initial investment cost.
The NPV of Machine B is calculated as the present value of an ordinary annuity of
$13,000 for 4 years, minus the initial investment cost.
By comparing the NPV of both machines, Cliff would choose Machine A because NPV of A > NPV of B by $1,044.
The Dickins Corporation is considering the acquisition of a new machine at a cost of $180,000. Transporting the machine to Dickins' plant will cost $12,000. Installing the machine will cost an additional $18.000. It has a 10-year life and is expected to have a salvage value of $10,000. Furthermore, the machine Es expected to produce 4.000 units per year with a selling price of $500 and combined direct materials and direct labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value Dickins has a marginal tax rate of 40%. What is the net cash flow for the tenth year of the project that Dickins should use in a capital budgeting analysis?
The company will receive net cash inflows of $50 per unit ($500 selling price --- $450 of variable costs), a total of $200.000 per year for 4.000 units. This amount will be subject to taxation, as will the $10,000 gain on sale of the irwestrnent, resetting in taxable income of $210,000. No depreciation will be deducted in the tenth year because the asset was fully depreciated after 5 years. Because the asset was fully depreciated (book value was $0), the $10,000 received as salvage value is fully taxable. At 40%, the tax on $210,000 is $84,000. After subtracting $84000 of tax expense from the $210,000 of inflows the net inflows amount to $126,000.
Book rate of return is an unsatisfactory guide to selecting capital projects because
I . It uses accrual accounting numbers
II . It compares a single project against the average of capital rejects.
III . It uses cash flows to gauge the desirability of the project.
A common misstep in regard to capital budgeting is the temptation to gauge the desirability of a project by using accrual accounting numbers instead of cash flows. Net income and book value are affected by the compas choices of accounting methods. A project's true rate of return cannot be dependent on bookkeeping decisions. Another distortion inherent in comparing a single project's book rate of return to the current one for the company as a whole is that the latter is an average of all of a firm's capital projects. Embedded in that average number 'may be a hand Full of good projects melding up for a large number of poor investments.
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