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The questions for CMA were last updated on Nov 21, 2024.
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McLean, Inc. is considering the purchase of a new machine that will cost $160,000. The machine has an estimated useful life of 3 years. Assume that 30% of the depreciable base will be depreciated in the first year1 40% in the second year, and 30% in the third year. The new machine will have a $10000 resale value at the end of its estimated useful life. The machine is expected to save the company $85000 per year in operating expenses. McLean uses a 40% estimated income tax rate and a 16% hurdle rate to evaluate capital projects. Discount rates for a 16% rate are as follows:
The payback period for this investment would be
The payback period is the number of years required for the cumulative undiscounted net cash inflows to equal the original investment. The future net cash inflows consist of $69,000 in Year 1 and 3, $75,000 in Year 2, and $10,000 upon resale. After 2 years, the cumulative undiscounted net cash inflow equals $144,000. Thus, $16,000 ($160,000 --- $144,000) is to be recovered in the Year 3, and payback should be complete in approximately 2.23 years [2 years + ($16,000 $69,000 net cash inflow in third year)]
The capital budgeting process contains several stages. At which stage are financial and non financial factors addressed?
During the information-acquisition stage of the capital budgeting process, quantitative financial factors are given the most scrutiny. These include initial investment and periodic cash inflow. Nonfinancial measures, both quantitative and qualitative, are also identified and addressed. Examples include the need for additional training on new equipment and uncertainty about technological developments and competitors' actions.
In the decision-making process, dentil\ting alternative courses of action can be accomplished by many methods. Which of the following is a method of idea generation that reports the first thought to come to mind in response to a given stimulus?
Identifying alternative courses of action can be primary or secondary, or it can be creative. One of the creative methods is free association. Free association is a method of idea generation that reports the first thought to come to mind in response to a given stimulus. The objective is to express the content of consciousness without censorship or control.
FLE Corporation had income before taxes of $50000. Included in the calculation of this amount was depreciation of $6,000, a charge of $7,000 for the amortization of bond discounts, and $5,000 for interest paid. The estimated pretax cash flow for the period is
To determine cash flow for the period, all noncash expenses should be added to income. Adding the $6,000 of depreciation and the $7,000 of discount amortization to $50,000 of income produces a pretax cash flow of $63,000. Interest is not added back to income because it requires a cash payment,
The costs described in situations 2, 3, and 5 are
Joint production costs are irrelevant to deciding whether to sell at split-off or to process further. Similarly, already incurred R&D costs and the costs of obsolete inventory are irrelevant to future decisions. Thus, these are examples of sunk costs. Sunk costs are unavoidable. They are the result of a past irrevocable decision and thus have no relevance to future decisions.
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