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    Daisy Guiral
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    1) Acme is considering selling a machine with a book value of $160,000 and 3 years remaining useful life for $200,000. The cash flow from selling after a 40% tax rate would be $184,000. 2) Hoff is considering selling a machine with a book value of $80,000 and 3 years remaining useful life for $50,000. The cash flow from selling at a 40% tax rate would be $30,000. 3) A corporation selling an asset for $12,000 that originally cost $10,000 with $6,000 depreciated would generate $8,800 in after-tax cash.

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    Dokumen.tips p02 Capital Budgeting

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    1) Acme is considering selling a machine with a book value of $160,000 and 3 years remaining useful life for $200,000. The cash flow from selling after a 40% tax rate would be $184,000. 2) Hoff is considering selling a machine with a book value of $80,000 and 3 years remaining useful life for $50,000. The cash flow from selling at a 40% tax rate would be $30,000. 3) A corporation selling an asset for $12,000 that originally cost $10,000 with $6,000 depreciated would generate $8,800 in after-tax cash.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    44 views174 pages

    Dokumen - Tips p02 Capital Budgeting

    Uploaded by

    Daisy Guiral
    1) Acme is considering selling a machine with a book value of $160,000 and 3 years remaining useful life for $200,000. The cash flow from selling after a 40% tax rate would be $184,000. 2) Hoff is considering selling a machine with a book value of $80,000 and 3 years remaining useful life for $50,000. The cash flow from selling at a 40% tax rate would be $30,000. 3) A corporation selling an asset for $12,000 that originally cost $10,000 with $6,000 depreciated would generate $8,800 in after-tax cash.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 174

    MANAGEMENTADVI

    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    CASHFLOW COMPUTATI ONS 42.Acmeisconsideri


    ngt hesal
    eofamachi newi t
    habookv alueof$160,
    000and
    CashFlowf rom Sal
    eofOl dMachi ne 3y ear
    sr emaini
    ng ini t
    susefull
    ife.Str
    aight-l
    inedepreciati
    onof$50,000
    SoldataLoss annual
    lyisavail
    able.Themachinehasacur rentmarketv al
    ueof$200,000.
    43.Hoffisconsideri
    ngt hesal
    eofamachi newi thabookv alueof$80, 000and3 Whatisthecashflowf r
    om sel
    l
    ingthemachi neifthet
    axr atei
    s40%?
    year
    sr emai ni
    ng ini t
    s usefullife. Str
    aight-l
    ine depreciati
    on of$25,000 a.$50,000 c. $184,000
    annuall
    yi savai
    lable.Themachi nehasacur rentmar ketv alueof$50,000. b.$160,000 d.$200, 000 L&H10e
    Whatist hecashflowf r
    om sell
    ingt hemachineifthetaxr at
    ei s40%?
    i
    i
    a.$25, 000 c. $62,000 . Acor porati
    onwithataxabl
    eincomeof$200, 000anda40percenttaxr
    atei
    s
    b.$50, 000 d.$80, 000 D,L&H9e consideri
    ngt hesal
    eofanasset .Theorigi
    nalcostoftheassetis$10,
    000,
    with $6,000 ofits depr
    eci
    ated.How much t ot
    alaf
    ter
    -t
    ax cash wil
    lbe
    43.Hoffisconsideri
    ngt hesal
    eofamachi newithabookv alueof$160,
    000and producedf r
    om thesaleoft
    heassetfor$12,
    000?
    3y earsr emaini
    ngi nitsusefull
    ife.Strai
    ght-l
    inedepreci
    ati
    onof$50,000 a.$10, 400 d.$( 3,200)
    annuall
    yi savail
    able.Themachinehasacur rentmarketval
    ueof$100,000. b.$12, 000 e. $8,800
    Whatist hecashflowf r
    om sel
    l
    ingthemachi neifthet
    axrateis40%? c. $11,200 H&M
    a.$50, 000 c. $124,000
    b.$100, 000 d.$160, 000 L&H10e I
    niti
    alNetCashInv estment
    Aft
    erTaxCashI nflowofSal eofOl dMachi neataGai n
    72.Pebbl
    eCo.r ecentl
    ysoldausedmachi nef or$40,000.Themachi nehada 36.Eyr
    ingIndustri
    eshasat ruckpur chasedseveny earsagoatacostof$6, 000.
    bookval
    ueof$60, 000atthet
    imeofthesale.Whati stheaft
    er-
    taxcashfl
    ow Atthetimeofpur chase,theultimatesalvagev aluewasest imat
    edat$500,
    fr
    om t
    hesale,assumingthecompany
    'smar ginalt
    axrateis20percent
    ? butsalv
    agev aluewasi gnoredi ndepreci
    ationdeductions.Thetrucki
    snow
    a.$40,000 c. $44,000 ful
    l
    ydepr eci
    ated.Assumi ngat axr at
    eof40%, i
    fthetr
    ucki ssol
    dfor$500,the
    b.$60,000 d.$32, 000 Bar
    fi
    eld aft
    er-
    taxcashi nfl
    owf orcapitalbudgeti
    ngpur poseswil
    l be:(
    E)
    a.$500. c. $200.
    i
    . TheAl phaBet aCorpor
    ati
    ondisposesofacapi talassetwit
    hanori
    ginalcost b.$300. d.$100. G&N9e
    of$85, 000 andaccumulated depreci
    ati
    onof$54, 500 f
    or$25,
    000.Al pha
    Beta'
    st axrateis40%.Cal
    culat
    etheaf t
    er-
    taxcashinflowfr
    om t
    hedisposalof OldMachi neSoldatBookVal ue
    thecapitalasset.(
    M) 50.HatchetCompanyi sconsi deri
    ngr eplaci
    ngamachi newi t
    habookv alueof
    a.$2, 200 c. $27,
    200 $400,000,a r emai
    ning usef ull i
    fe of5 y ears,and annualst r
    aight-
    line
    b.( $2,200) d.$31,500 Horngren depreciat
    ionof$80,000.Theexi sti
    ngmachi nehasacur r
    entmarketv al
    ueof
    $400,000.Ther epl
    acementmachi newoul dcost$550, 000,havea5-yearlife,
    SoldataGain andsav e$75,000pery eari ncashoper at
    ingcost s. Ifthereplacement
    42.Acmei sconsi
    deringthesaleofamachi newithabookv alueof$80,
    000and machi newouldbedepr eciatedusingt hestraight-
    li
    nemet hodandthet axrate
    3y ear
    sr emaini
    ngi nitsusefulli
    fe. Str
    aight-
    li
    nedepreciat
    ionof$25,
    000 i
    s40%,whatwoul dbet heneti nv estmentr equir
    edt oreplacet
    heexi sting
    annual
    lyisavail
    able.Themachi nehasacur rentmarketvalueof$100,
    000. machi ne?(D)
    Whatisthecashf l
    owf r
    om sel
    li
    ngthemachi neifthet
    axrate40%. a.$90, 000. c. $330,000
    a.$25,000 c. $92,000 b.$150, 000 d.$550, 000 D,L&H9e
    b.$80,000 d.$100, 000 D,L&H9e
    56.Bi
    gCi
    tyMot
    orsi
    str
    yingt
    odeci
    dewhet
    heri
    tshoul
    dkeepi
    tsexi
    sti
    ngcar
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page1of1
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    washingmachi neorpur chaseanewonet hathast echnologicaladv ant ages bookval


    ueofP70,
    000wi
    l
    lberepl
    acedbyanewmachi necost
    ingP150,
    000.
    (whi
    cht ransl at
    ei ntocostsav ings)overtheexistingmachi ne.Informat ionon Themarketval
    ueoft
    heoldmachi
    neisP50,000.Theaft
    ertaxinv
    estment
    eachmachi nef oll
    ows: outl
    ayi
    s(E)
    Ol
    dmachi ne Newmachi ne a.P82,500 c. P107,000
    Ori
    ginal cost $9,
    000 $20,000 b.P93,000 d.P135, 000 RPCPA1085
    Accumul ateddepr eciati
    on 5,
    000 0
    Annual cashoper atingcosts 9,
    000 4,
    000 *
    .Indeci dingthei nv
    estmenti
    napr oject
    ,cashflowsshouldbeadj ustedfor
    Curr
    entsal v agev alueofol dmachi ne 2,
    000 thei
    rtaxef f
    ect.Assumeanincomet axrat
    eof35%.Anol dequipmentwi t
    ha
    Sal
    vagev aluei n10y ear
    s 500 1,
    000 bookv al
    ueofP15, 000wil
    lbereplacedbyanewequi pmentcostingP50,000.
    Remaini ngl ife 10y rs. 10y rs. Themar ketv al
    ueoftheoldequipmentisP11,000.Theafter
    -taxinvestment
    Theincrement alcostt opurchaset henewmachi neis outl
    ayis( E)
    a.$11, 000. c. $13,000. a.P34, 400 c. P39,
    000
    b.$20, 000. d.$18, 000. Bar fiel
    ds b.P37, 600 d.P40,400 RPCPA0581

    Ol
    dMachi neSol dataGain OldEquipmentSol dataLoss, Addit
    ionalWorkingCapi t
    al
    i
    ii
    .RegalI ndustri
    esisreplaci
    ngagr inderpurchased5y earsagof or$15,000 *. Dil
    imanRepubl i
    cPubl isher s,I
    nc.isconsideringreplacinganol dpr essthat
    wit
    h a new one cost i
    ng $25,
    000 cash. The or igi
    nalgrinderi s being costP800,000si xy earsagowi t
    hanew onet hatwoul dcostP2, 250,
    000.
    depreciatedonast r
    aight-
    li
    nebasisov er15y earstoazer osal vagev alue. Shippi
    ngandi nstallati
    onwoul dcostanaddi t
    ionalP200, 000.Theol dpress
    Regalwi l
    lsel
    lthi
    soldequi pmenttoat hir
    dpar t
    yf or$6,
    000cash.Thenew hasabookv al
    ueofP150, 000andcoul dbesol dcur rentl
    yforP50, 000.The
    equi
    pmentwi l
    lbedepreci
    atedonast rai
    ght-
    li
    nebasi sover10y earstoazer o i
    ncreasedpr oductionoft henewpr esswouldincreasei nventor
    iesbyP40,000,
    sal
    vage v al
    ue. Assumi ng a 40% mar gi
    nalt ax rat
    e,Regal ’
    s netcash accountsreceivablebyP160, 000andaccount spay ablebyP140, 000.Dili
    man
    i
    nvestmentatt heti
    meofpur chaseiftheoldgrinderissoldandt henewone Republi
    c’sneti nitiali nvest mentf oranal
    y zi
    ngt heacqui siti
    onoft henew
    i
    spur chasedi s pressassumi nga35%i ncomet axr at
    ewoul dbe(D)
    a.$19, 000 c. $17,
    400 a.P2, 450,
    000 c. P2,600,000
    b.$15, 000 d.$25,000 CMA 1292 b.P2, 425,
    000 d.P2, 250,000 RPCPA0595
    4-9
    44.Superstruti sconsi
    deri
    ngr eplaci
    nganol dpressthatcost$80,000sixy ears
    i
    v
    . Amachinethatcost$50,
    000andi
    sf ul
    l
    ydepreci
    atedissoldfor$10,
    000.The agowi t
    hanewonet hatwoul dcost$245,000.Theoldpresshasanetbook
    $10,
    000isthenusedasadownpay mentont hepurchaseofanewmachi ne val
    ueof$15, 000andcoul dbesol dfor$5,000.Theincr
    easedpr oduct
    ionof
    cost
    ing$75,
    000.Assuminga40%t axrat
    e,t
    heout -
    of-
    pocketcostofthenew thenew pr esswouldr equi
    reani nvestmentinaddit
    ionalworki
    ngcapi talof
    machinei
    s: $6,000.Thecompany '
    st axrateis40%.Super st
    rut
    'snetinvestmentnow i n
    A.$75,000 C.$65,000 theprojectwoul dbe:(M)
    B.$71,000 D.$69,000 C&U a.$256, 000. c. $250,
    000.
    b.$242, 000. d.$245,000. CMAadapt ed
    Ol
    dEquipmentSol
    dataLoss
    *.Inmakingadecisi
    ontoinv
    esti
    naproj
    ectt
    hecashflowshoul
    dbeadj
    usted Ol
    dMachi neSol
    dataLoss,CashCostSav i
    ngsonNewMachi ne
    fort
    heirt
    axeff
    ect.Assumeani
    ncometaxr
    ateof35%anoldmachi
    newit
    ha v. A companyis consi
    der
    ing replaci
    ng exist
    ing 2-
    year-
    old equi
    pment.Thi
    s
    pr
    ojectwil
    lrequi
    rea discounted cash f
    low analysi
    st o det
    ermi
    nei ft
    he
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page2of2
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    benef i
    tsexceedt hecost s.Year-enddat ar egardingt heexi sti
    ngandnew yearsago.Acqui sit
    ioncosti sP450, 000wi thsalvagevalueofP50, 000.The
    equipmentar eshownbel ow. machi nebeingconsi derediswor thP800, 000andt hesupplieriswi l
    lingto
    Existi
    ngEqui pment NewEqui pment accepttheol dmachi neatat r
    ade-i
    nv alueofP60, 000.Shouldt hecompany
    Original cost $600,000 $540, 000 decidenott oacquir
    et henewmachi ne, i
    tneedst orepai
    rtheoldoneatacost
    Usef ul l
    ife(iny ears) 5 3 ofP200, 000.Tax-wise,thetrade-i
    nt ransactionwillnothaveanyi mplicati
    on
    Remai ningl i
    fe( iny ears) 3 3 butt hecostt orepairistax-deducti
    ble.Theef fecti
    vecorporatet axrateis
    Annual depr eciation $120,000 $180, 000 35%ofneti ncomesubj ecttotax.Forpur posesofcapi t
    albudgeting,thenet
    Accumul ated $240,000 N/ A* i
    nvest mentinthenewmachi neis(M)
    depr eciation a.P540, 000 c. P660,000
    Bookv alue $360,000 N/ A* b.P610, 000 d.P800, 000 RPCPA0597
    Cur r
    ent cash di sposal $100,000 N/ A*
    value Old MachineTr aded-in,OtherAsset sWr i
    tt
    enOf f
    ,Av oi
    dableCost ,Additi
    onal
    *Val uei snotappl icabl eher e. WorkingCapi t
    al
    Thenew equi pmentwi l
    lr esultincashoper ati
    ngcostsav ingsof$150, 000 *. GreatVal ue Companyi s planning t o purchase a new machi ne costing
    annual ly,bef oret axes.Thenew equi pmentwoul dbepur chasedl ateint he P50,000wi thf r
    eightandinstall
    ationcost samount ingtoP1,500.Theol dunit
    currenty eart obeoper ationalatt hebegi nni
    ngoft hefirstyearoft hepr oj
    ect. i
    st obet raded- i
    nwi llbegivenat rade-inall
    owanceofP7, 500.Ot herassets
    Theexi st i
    ngequi pmentwoul dbesol dear lyint hefir
    sty earoft hepr oj
    ect, thataretober etir
    edasar esultoft heacquisiti
    onoft henewmachi necanbe
    meani ngnof urtherdepr eciati
    onwoul dbet akenoni t.Thecompanyhasan salvagedandsol dforP3,000.Thel ossonr eti
    rementoft heseotherassetsis
    effecti
    v ei ncomet axr ateof40%.Oft hef ol
    lowing,whi char et hecor rect P1,000whi chwi llreduceincomet axesofP400.I fthenewequi pmenti snot
    fi
    gur est obeusedi nt hecashf lowanal ysisf orthefir
    sty earoft hispr oposed purchased, r
    epai roftheoldunitwi llhavetobemadeatanest imatedcostof
    project? CIA0596I I
    I-
    78 P4,000. Thi s costcan be av oided bypur chasing t
    he new equi pment.
    Af t
    er-TaxCash Proceedsf rom Sal e TaxBenef itfrom Sale Additi
    onalgr oss wor ki
    ng capitalofP12, 000 wi llbe needed to support
    Oper atingSav ings ofExistingEqui pment ofExi stingEqui pment operati
    onpl annedwi tht
    henewequi pment.
    Theneti nvestmentassi gnedtothenewmachi nefordeci
    sionanalysisis(D)
    A. $90,000 $100,000 $0
    a.P50, 200 c. P53,600
    B. $60,000 $60,000 $104, 000
    b.P52, 600 d.P57, 600 RPCPA1080
    C. $90,000 $100,000 $104, 000
    D. $60,000 $40,000 $156, 000
    I
    nit
    ialCashOut lay
    v
    ii
    .Lawson I nc.i s expanding its manuf acturi
    ng plant
    ,whi ch r equir
    es an
    OldMachineTraded-i
    n i
    nvestmentof$4mi ll
    i
    oni nnewequi pmentandpl antmodi f
    icati
    ons.Lawson's
    v
    i
    . Amachi nethatcost$50,
    000andisful
    lydepr
    eciat
    edi
    sal
    l
    owedasa$10,000 sal
    esar eexpect edt oincreaseby$3mi lli
    onpery earasar esultofthe
    tr
    ade-i
    nonamachi necost
    ing$75,
    000.Assuminga40%taxr
    ate,t
    heout
    -of
    - expansion.Cash i nvest
    menti n curr
    entasset s averages 30% ofsal es;
    pocketcostofthenewmachineis: accountspay abl
    eandot hercur r
    entliabil
    i
    tiesare10% ofsal es.Whati sthe
    A.$75,000 C.$65,000 esti
    matedt otal i
    nvest
    mentf orthisexpansion?(E)
    B.$71,000 D.$69,000 C&U A.$3. 4mi l
    lion. C.$4. 6mi l
    l
    ion.
    B.$4. 3mi l
    lion. D.$4. 9mi l
    l
    ion. CMA12954- 8
    OldMachi
    neTraded-
    in,
    Avoidabl
    eCost
    *. KeyCor
    p.planstorepl
    aceaproduct
    ionmachi
    net
    hatwasacqui
    redsev
    eral v
    ii
    i.
    Kli
    neCor
    por
    ati
    oni
    sexpandi
    ngi
    tspl
    ant
    ,whi
    chr
    equi
    resani
    nvest
    mentof$8
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page3of3
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    mill
    i
    oni nnewequipment.Kl
    ine'
    ssalesareexpectedt oincr
    easeby$6mi lli
    on i
    nworki
    ngcapital
    foryear5.(
    E)
    pery earasar esul
    toft heexpansion.Cashi nvestmentincur rentassets A.I
    ncreasesby$6,000 C.I
    ncreasesby$8,000
    averages30%ofsales,andaccountspayableandot hercurrentli
    abil
    it
    iesare B.Decreasesby$6,000 D.Decreasesby$7,000 B&M
    10%ofsal es.Whati
    stheesti
    matedt ot
    alcashinvestmentforthisexpansion?
    (E) 34.Acorporat i
    onisconsideringexpandingoper at
    ionst omeetgrowingdemand.
    A.$6. 8mi l
    li
    on. C.$9.2mi lli
    on. Withthecapi talexpansion,thecur rentaccount sareexpectedtochange.
    B.$8. 6mi l
    li
    on. D.$9.8mi lli
    on. Glei
    m Managementexpect scasht oi ncreaseby$20, 000,accountsrecei
    vabl
    eby
    $40,
    000, andinventori
    esby$60, 000.Att hesamet i
    meaccount spay
    ablewil
    l
    TaxonSaleofOldMachine i
    ncreaseby$50, 000,accrual
    sby$10, 000,andlongt er
    m debtby$100,000.
    i
    x
    . A machinewithabookv al
    ueof$30,000couldbesoldfor$40,
    000.The Thechangei nnetwor kingcapit
    al i
    s(E)
    cor
    porati
    onthatownsthemachi
    nehastaxabl
    eincomeof$35,
    000anda40 A.ani ncreaseof$120, 000. C.adecr easeof$120,000.
    per
    centtaxr
    ate.Whatwoul
    dbethet
    axont hesal
    eofthemachi
    ne? B.adecr easeof$40,000. D.ani ncreaseof$60,
    000. Gi t
    man
    a.$0 d.$4,000
    b.$10,000 e. $13,
    600 35.Acorporat i
    onisconsideringexpandingoper ati
    onst omeetgrowingdemand.
    c. $6,
    000 H&M Withthecapi talexpansiont hecur rentaccountsar eexpectedtochange.
    Managementexpect scasht oincreaseby$10, 000,accountsrecei
    vabl
    eby
    Opportunit
    yCosts $20,
    000, andinventori
    esby$30, 000.Att hesamet i
    meaccount spay
    ablewil
    l
    11.Afirm ownsabui l
    dingwit
    habookv alueof$100,
    000andamar ketvalueof i
    ncreaseby$40, 000,accr ual
    sby$30, 000,andlongt er
    m debtby$80,000.
    $250,000.Ifthebuildi
    ngisut
    il
    izedforaproj
    ect,t
    hentheopportuni
    tycost Thechangei nnetwor kingcapital
    is(E)
    i
    gnor i
    ngtaxesis: A.ani ncreaseof$10, 000. C.adecr easeof$90,000.
    A.$100, 000 C.$250,000 B.adecr easeof$10,000. D.ani ncreaseof$80,
    000. Gi t
    man
    B.$150, 000 D.Noneoft heabov
    e B&M
    CashI nf
    low
    12.Afir
    m hasagener al
    -purposemachi
    newhichhasabookv alueof$500,
    000 Before-t
    axCashI nfl
    ow
    andissoldfor$600,000int hemar
    ket.Ifthetaxrateis30%,whatisthe 69.CCor p.facesamar gi
    naltaxrat
    eof35per cent.Oneproj
    ectthatiscurrentl
    y
    oppor
    tuni
    tycostofusingthemachi
    neinaproject
    ? underev aluati
    onhasacashf l
    ow int hefour t
    hy earofit
    slifethathasa
    A.$500,000 C.$570,000 presentv alueof$10,
    000( af
    ter
    -tax)
    .C Cor p.assumest hatallcashf lows
    B.$600,000 D.Noneoft heabove B&M occurattheendoft heyearandthecompanyuses11per centasitsdiscount
    rate.Whati sthepre-
    taxamountoft hecashf l
    ow inyear4?(Roundt ot he
    WorkingCapital nearestdollar
    .)(M)
    23.Forproj
    ectAi nyear2,i
    nvent
    ori
    esi
    ncreaseby$16,000andaccountspayable a.$15, 181 c. $9,868
    by$4,000.Calculat
    etheincr
    easeordecreaseinnetworki
    ngcapit
    alforyear b.$23, 356 d.$43, 375 Barfiel
    d
    2.(E)
    A.I ncr
    easesby$12,000 C.I ncr
    easesby$16,000 43.Att heBartholomew Companyl astyearal lsal
    eswer ef orcash and all
    B.Decr easesby$12,000 D.Decr easesby$16,000 B&M expenseswer epaidincash.Thet axratewas30%.I ftheaf t
    er-t
    axnetcash
    i
    nflowfrom theseoperat
    ionslastyearwas$10,500,andift
    het otalbef
    oret
    ax
    24.Forpr
    ojectX,y
    ear5inv
    entori
    esdecr
    easeby$5,
    000,accountsrecei
    vabl
    eby cashexpenseswer e$35,000,thenthetotalbef
    ore-
    taxcashsal esmusthave
    $3,
    000andaccount
    spayablesby$2,
    000.Cal
    cul
    atet
    heincreaseordecrease been:(M)
    CMAEXAMI NATIONQUESTIONS Page4of4
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$65,
    000. c. $45,
    000.
    b.$60,
    000. d.$50,000. G&N9e 46.Lastyearthesal
    esatSeidel
    manCompanywer e$700,000andwereal lcash
    sal
    es.Thecompany'sexpenseswere$450,000andwer eallcashexpenses.
    Ti
    mi ngofCashFlow Thetaxr at
    ewas35%.Theaf t
    er-
    taxnetcashinfl
    ow atSeidel
    manl astyear
    x. Assumet hattheint
    erestrateisgreatert
    hanzer o.Whi
    chofthef ol
    l
    owing was:(
    E)
    cash-
    inf
    lowstreamsshouldyouprefer? Gl
    eim a.$700,000. c. $162,
    500.
    Year1 Year2 Year3 Year4 b.$250,000. d.$87,500. G&N9e
    A. $400 $300 $200 $100
    B. $100 $200 $300 $400 xi
    .Apr ojectisexpectedt oresul
    tinthef ol
    lowi
    ngadj
    ustmentsovert
    henextyear
    :
    C. $250 $250 $250 $250  Cashsal esincreaseby400,000.
    D. Anyofthese,si
    ncetheyeachsum to$1,
    000.  Expenses( exceptdepreci
    ation)incr
    easeby180,
    000.
     Depr eci
    ati
    onincreasesby80, 000.
    Af
    ter-t
    axNetCashInf
    lowforaCer
    tai
    nYear Assumet hecor poratetaxratei s34%.Thet otalrel
    evantnetcashfl
    ows
    5.Youar egivent
    hefol
    lowi
    ngdat
    aforyear1.Revenue=$43;Tot
    alcosts=$30; duri
    ngt hatyearare
    Depreci
    ati
    on=$3;Taxrat
    e=30%.Calculat
    ethecashfl
    owfortheproj
    ectf
    or A.92, 400 C.172,
    400
    year1.(
    E) B.140, 000 D.220,
    000 CI
    A0591IV-52
    A.$7 C.$13
    B.$10 D.Noneoft heabov
    e B&M AnnualCashI nf
    low
    xi
    i.Acompanyconsi dersaprojectt
    hatwillgeneratecashsal
    esof$50, 000per
    6.Youaregiventhefoll
    owingdatafory ear1:Revenues=100,Fi
    xedcost
    s=30; year
    .Fixedcostswil
    lbe$10,000peryear,var
    iablecost
    swillbe40%ofsal es,
    Totalvar
    iabl
    ecosts=50;Depr eci
    ation=$10;Taxr ate=30%.Calcul
    atet
    he anddepr eci
    ati
    onoft heequipmentint heprojectwil
    lbe$5, 000pery ear.
    aft
    ertaxcashflowforthepr
    ojectfory ear1.(
    E) Taxesar e40%.Theexpect
    edannualcashflowt othecompanyr esul
    ti
    ngfr
    om
    A.$17 C.$10 theprojecti
    s
    B.$7 D.Noneoft heabov
    e B&M A.$15, 000 C.$19, 000
    B.$9, 000 D.$14, 000 CIA1193IV-50
    Aft
    er-TaxNetCashI nfl
    ow
    40.Lasty earthesalesatJerseyCompanywer e$200,
    000andwer eallcash *
    . GuemonCompanyi st akingintoaccountt hereplacementofanol dmachi ne
    sales.TheexpensesatJerseywere$125,000andwereallcashexpenses. now inusewi thanew machi necostingP100, 000. Thereplacementi s
    Thet axrat
    ewas30%.Theaf t
    er-
    taxnetcashi
    nfl
    owatJerseylastyearfr
    om expect
    edt oproduceanannual cashsavingsofP22, 500befor
    eincomet axes.
    theseoperati
    onswas:(E) Theestimat edusef
    ull i
    feoft henew machi neist enyearswit
    hnor esidual
    a.$37, 500. c. $22,
    500. val
    ue.Thebookv alueoft heol dmachinei sP37,500andi sexpectedtol ast
    b.$60, 000. d.$52,500. G&N9e foranotherf i
    veyear s. I tisbeingdepr eciat
    edatP8, 000 pery ear. The
    i
    ncomet axr at
    eis25%.
    41.Lastyearafir
    m hadt axabl
    ecashreceiptsof$800,
    000andthet
    axr
    atewas Theannual cashsavingsaf t
    ertaxis(
    M)
    30%.Theafter
    -taxnetcashinf
    lowf
    rom t heser
    ecei
    ptswas(
    E) a.P15,375 c. P17,375
    a.$800,000. c. $560,
    000. b.P16,875 d.P20, 520 RPCPA0583
    b.$640,000. d.$240,000. G&N9e

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page5of5
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    TotalCashInflow theexpectednetcashf
    lowf
    rom t
    hepr
    ojecti
    nthetent
    hyeari
    s(D)
    xi
    i
    i
    .ThePhenom Cor por
    ati
    onhasanannualcashi nfl
    owfrom operat
    ionsfr
    om its a.$32, 000 c. $20,000
    invest
    menti nacapi talassetof$50,
    000f orf i
    veyear
    s.Thecor por
    ati
    on's b.$24, 000 d.$11, 000 CMA12924-
    incomet axr at
    ei s40%.Calcul
    atet
    hefivey earstot
    alafter
    -t
    axcashi nfl
    ow 10
    from operati
    ons.(M)
    a.$250, 000 c. $150,000 MachineSoldataGai n,CosttoRemov e
    b.$175, 000 d.$50, 000 Horngr
    en *
    . LorI ndustri
    esisanalyzi
    ngacapi tali
    nv estmentpr oposalfornewmachi nery
    topr oduceanewpr oductov erthenextt eny ears.Attheendoft heteny ears,
    CashOut f
    low themachi nerymustbedi sposedofwi thazer onetbookv al
    uebutwi t
    ha
    Before-
    TaxCashOut flow scr apsalvagevalueofP20, 000. Itwillr equir
    esomeP30, 000tor emov ethe
    39.Consideramachi newhichcost s$115,000nowandwhi chhasausef
    ull
    if
    eof machi nery.Theappl i
    cabletaxr at
    eis35%.Theappr opr
    iate“end-of-
    li
    fe”cash
    seveny ears.Thi
    smachi newi llr
    equireamaj orov
    erhaulatt
    heendoft he flowbasedont heforegoi
    ngi nformati
    oni s(D)
    fourt
    hy earwhichwi l
    lcost"X"doll
    ars.Ifthetaxrat
    eis40%,andift
    heaft
    er- a.I nf
    lowofP30,000. c. Out fl
    owofP10, 000.
    taxcashout fl
    owf ort
    hisoverhauli
    s$3, 600,t
    hentheamountof"X"i
    ndol
    lars b.Out fl
    owofP6, 500. d.Out fl
    owofP17, 000. RPCPA0596
    is:(
    E)
    a.$6, 000. c. $2,
    160. MachineSol dataTaxabl eLoss, CosttoRemov e
    b.$9, 000. d.$1,440. G&N9e xv
    .Kor eIndustri
    esisanal yzi
    ngacapi talinvest mentpr oposalf ornewequi pment
    toproduceapr oductov erthenext8y ears. Theanal ysti sat t
    empt i
    ngto
    “End-of
    -Li
    fe”CashFl ow deter
    minet heappr opri
    ate“end-of-
    li
    fe”cashf lowsf ortheanal ysis.Attheend
    BasedonI nternalRateofRet urn of8y ears,theequi pmentmustber emov edf rom theplant ,andwi llhavea
    *. Acompanyi sconsi der
    ingput ti
    ngupP50, 000i nat hree-
    y earproj
    ect
    .The netbookv alueofzer o,at axbasisof$75, 000,acostt or emov eof$40,000,
    company ’sexpectedr ateofr eturnis12%.Thepr esentv al
    ueofP1. 00at12% andscrapsal v
    agev al
    ueof$10, 000.Kor e’sef fecti
    v etaxr
    at eis40%.Whati s
    foroney earis0.893, f
    ortwoy earsis0.797, andfort hreeyear si
    s0.712.The theappropriat
    e“ end-of-l
    i
    fe”cashf lowr elatedt ot heseit
    emst hatshouldbe
    cashf l
    ow, netofincomet axeswi llbeP18,000( presentv alueofP16,074)for usedintheanal y
    sis?( D)
    thef i
    rsty earandP22, 000( presentv al
    ueofP17, 534)f ort hesecondy ear
    . a.$45, 000 c. $12, 000
    Assumi ngt hatt
    her ateofr eturnisexactly12%,t hecashf low,netofincome b.$27, 000 d.$( 18,000) CMA12954-
    taxes,fort hethi
    rdy earwoul dbe( M) 15
    a.P7, 120 c. P16, 392
    b.P10, 000 d.P23, 022 RPCPA1081 xv
    i.Met rejean Indust ri
    esi sanalyzing a capitalinv est
    mentproposalfornew
    equipmentt opr oduceapr oductov erthenext8y ear
    s.Attheendof8y ears,
    MachineSol dataGai n,Worki
    ngCapi t
    alReleased theequi pmentmustber emov edf r
    om thepl antandwi l
    lhaveanetbook
    xi
    v.Gar f
    iel
    dI nc.i s consideri
    ng a 10- y
    earcapi talinvestmentpr oj
    ectwi th val
    ueof$0,at axbasisof$150, 000,acostt oremov eof$80,
    000,andscrap
    forecasted r
    ev enuesof$40, 000 pery earand f or
    ecasted cash operati
    ng sal
    v agev al
    ueof$20, 000.Met rejean’seff
    ect i
    vet axrat
    eis40%.Whati sthe
    expensesof$29, 000pery ear. Thei nit
    ialcostoft heequi pmentf orthe appropr iate“end- of-
    li
    fe”cashflowr elat
    edt othesei t
    emsthatshoul
    dbeused
    projectis$23,000,andGar fieldexpectst oselltheequipmentf or$9,000at i
    nt heanal ysis?(D)
    theendoft het enthyear.Theequi pmentwi l
    lbedepr eciat
    edov er7y ears. a.$90, 000 c. $24,000
    Thepr ojectrequiresawor ki
    ngcapi talinvest
    mentof$7, 000ati tsincepti
    on b.$54, 000 d.$( 36,000)
    andanot her$5, 000attheendofy ear5.Assumi nga40%mar gi
    naltaxrate, Gl eim
    CMAEXAMI NATIONQUESTI ONS Page6of6
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$4,
    800i
    nfl
    ow. c. $4,
    800out
    fl
    ow.
    TaxSav ings b.$3,
    200i
    nfl
    ow. d.$3,200out
    fl
    ow. G&N9e
    OnDepr eciati
    on
    xv
    ii
    .Ifthet axr at
    eis40%andacompanyhas$400, 000ofi
    ncome,
    adepr
    eci
    ati
    on I
    ncrement al Bef
    ore-taxProfit
    xi
    x
    deductionof$50,000woul
    dresul
    tinataxsavi
    ngsof .Maxwel lCompanyhasanoppor tuni
    t ytoacqui r
    eanew machi netorepl
    ace
    a.$17, 000 c. $30,
    000 oneofi tspresentmachi nes.Thenewmachi newouldcost$90,000,havea5-
    b.$20, 000 d.$33,000 H&M yearlif
    e,andnoest i
    mat edsalvageval ue.Variabl
    eoper ati
    ngcostswouldbe
    $100,000pery ear.Thepr esentmachi nehasabookv alueof$50,
    000anda
    xv
    ii
    i
    .I
    fthetaxrat
    eis40%andacompanyhas$400, 000ofi
    ncome,
    adepr
    eci
    ati
    on remainingl i
    feof5y ears.I tsdisposalv al
    uenow i s$5,000,butitwouldbe
    deduct
    ionof$80,
    000woul
    dresul
    tinataxsavi
    ngsof zeroaf ter5y ear s. Variabl
    eoper atingcostswoul dbe$125, 000pery ear
    .
    a.$52,800 c. $32,
    000 Ignoreincomet axes. Consi deri
    ngt he5y earsintotal,whatwouldbet he
    b.$48,000 d.$27,200 H&M diff
    erencei npr ofitbeforeincomet axesbyacqui ri
    ngt henew machi neas
    opposedt oret
    ainingthepr esentone?
    25.I
    fthedepreci
    ati
    onamounti
    s$100,000andthemargi
    naltaxr
    atei
    s30%,t
    hen A.$10, 000decr ease C.$35,000increase
    thet
    axshiel
    dduetodepr
    eci
    ati
    onis:(E) B.$15, 000decr ease D.$40,000increase C&U
    A.$333,333 C.$30,
    000
    B.$100,000 D.Noneoftheabove B&M NetCashFl ow
    Pr esentValueofNetCashFlow
    xx
    26.I
    ft hedepreci
    ati
    onamounti
    s600,
    000andt
    hemarginalt
    axrat
    eis35%,t
    hen .Att heendofthenextfouryears,anewmachi neisexpect edt
    ogener at
    enet
    thetaxshiel
    dduetodepr
    eci
    ati
    oni
    s:(
    E) cashf l
    owsof$8,000,$12,000,$10,000,and$15,000,respect
    ivel
    y.Whatare
    A.$180, 000 C.$210,
    000 thecashf lowsworthtodayifa3% i nt
    erestr
    atepr operl
    yrefl
    ectsthetime
    B.$600, 000 D.Noneoftheabove B&M valueofmoneyinthi
    ssi t
    uati
    on?( E)
    A.$41, 556. C.$32,400.
    45.Kane Companyi sint he process ofpur chasing a new machi ne forits B.$47, 700. D.$38,100. S,S&T
    product ionl ine.Itisneart heendoft hey ear,andt hemachi nei sbeing
    offeredataspeci aldiscountifpurchasedbef oret heendoft hey ear.Kane 3.Asa19t hcent uryeconomi st
    ,youar efacedwi tht hefoll
    owi ngproblem.The
    hasdet ermi nedthatthedepr eci
    ati
    ondeduct i
    onf ortaxpur posesont henew world'
    sshippingf l
    eetconsistsofsteamshi psandsai l
    i
    ngshi ps.Eachcanbe
    machi nef ort heyearofpur chasewoul dbe$13, 000.Thet axratei s30%.If usedtocar r
    ycar goorpassenger s.Theshi pshav esimilarsail
    ingcapaciti
    es
    Kanepur chasest hemachi neandr eport
    saposi ti
    v enetincomef ort heyear
    , butdif
    ferintheirannualoperati
    ngcost sasf oll
    ows:
    thent het axsav i
    ngsf r
    om thedeprecat i
    ontaxshi el
    drelatedt othismachi ne Steam Sail
    forthey earofpur chasewoul dbe:(
    E) Cargo $80,000 $95,000
    a.$3, 900. c. $13,000. Passenger $90,000 100,000
    b.$9, 100. d.$0. G&N9e
    Assume:( i
    )Far esarecompet i
    ti
    vel
    ydet ermined,( i
    i)demandi snotexpect ed
    tochange, (
    ii
    i)eachv esselhasal i
    feof15y ears,(i
    v)currentsalvagevalueof
    38.Supposeamachi net hatcosts$80,
    000hasausef ull
    if
    eof10y ear
    s.Al so
    eit
    hership(saili
    ngorst eam)i s$114,091,and( v)Costofcapi talis10%,(vi
    )
    supposethatdepreci
    ati
    onont hemachi
    neis$8,000fort
    axpur posesiny ear
    notaxes.Whati sthepresentvalueofast eam shi p?
    4.Thetaxr at
    eis40%.Thet axsavi
    ngsfr
    om thedepreciat
    iontaxshi el
    di n
    A.$190, 152 C.$609, 486
    year4wouldbe:(E)
    CMAEXAMI NATIONQUESTI ONS Page7of7
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    B.$251,
    326 D.Noneoft
    heabov
    e B&M PresentValueofAfter-TaxCashExpense
    27.A companyant i
    cipatesataxablecashexpenseof$10, 000inyear2ofa
    5.Asa19t hcent uryeconomi st,youar efacedwi tht hefoll
    owi ngproblem.The project.Thecompany '
    staxr at
    ei s30% andi t
    sdi scountrat
    eis8%.The
    world'
    sshippi ngf l
    eetconsistsofst eamshi psandsai l
    i
    ngshi ps.Eachcanbe presentvalueofthisfut
    urecashflowi
    sclosestto:(
    M)
    usedtocar rycar goorpassenger s.Theshi pshav esimilarsail
    ingcapaciti
    es a.( $3,
    000). c. (
    $7,000).
    butdif
    ferint heirannualoper ati
    ngcost sasf oll
    ows: b.( $2,
    572). d.($6,001). G&N9e
    Steam Sail
    Cargo $80,000 $95,000 28.A companyant i
    cipat
    esat axabl
    ecashexpenseof$40, 000iny
    ear2ofa
    Passenger $90,000 100,000 pr
    oject.Thecompany 'st
    axr ateis30% anditsdiscountrat
    eis10%.The
    pr
    esentvalueofthisf
    utur
    ecashf l
    owiscl
    osestto:(
    M)
    Assume:( i
    )Far esarecompet iti
    vel
    ydet ermined,( i
    i)demandi snotexpect ed
    a.( $23,
    140). c. ($12,
    000)
    .
    tochange, (
    iii)eachv esselhasal i
    feof15y ears,(i
    v)currentsalvagevalueof
    b.( $9,
    917). d.( $28,
    000)
    . G&N9e
    eit
    hership( saili
    ngorst eam)i s$114,091,and( v)Costofcapi talis10%,(vi
    )
    notaxes.I ft hecostofcar ryingcargobysai li
    ngshi pwer e$75,000pery ear,
    29.A companyant i
    cipat
    esat axabl
    ecashexpenseof$60, 000iny
    ear2ofa
    whatwoul dbet hepresentv alueofast eamshi p?
    pr
    oject.Thecompany 'st
    axr ateis30% anditsdiscountrat
    eis14%.The
    A.$114, 091 C.$215, 000
    pr
    esentvalueofthisf
    utur
    ecashf l
    owiscl
    osestto:(
    M)
    B.$152, 814 D.Noneoft heabov e B&M
    a.( $13,
    850). c. ($32,
    318)
    .
    b.( $42,
    000). d.( $18,
    000)
    . G&N9e
    PresentVal
    ueof1Comput ati
    ons
    PresentVal
    ueofTaxableCashRecei pts
    37.Supposeamachi necosts$20,000now,hasanexpect edli
    feofei
    ghtyear
    s,
    24.Acompanyant i
    cipat
    esat axablecashreceiptof$50,000i
    nyear4ofaproject.
    andwillrequir
    ea$7,000ov er
    haulatt
    heendoft hethi
    rdyear
    .Ift
    hetaxr
    ateis
    Thecompany '
    staxrateis30%andi tsdiscountratei
    s12%.Thepresentvalue
    40%,thent heaft
    er-
    taxcostofthi
    soverhaul
    woul dbe:
    (E)
    ofthi
    sfutur
    ecashf l
    owi sclosestt
    o:(M)
    a.$12, 000. c. $8,000.
    a.$22,243. c. $9,533.
    b.$4, 200. d.$2, 800. G&N9e
    b.$35,000. d.$15, 000. G&N9e
    42.Acompanyhadtax-deduct
    iblecashexpensesof$650,000lastyearandthe
    25.Acompanyant i
    cipat
    esataxabl
    ecashreceiptof$20,000inyear3ofaproject.
    taxr
    atewas30%.Theafter
    -taxnetcashoutfl
    owfortheseexpenseswas:(
    E)
    Thecompany'staxratei
    s30%andi t
    sdiscountr at
    ei s8%.Thepresentvalue
    a.$195,000. c. $650,
    000.
    oft
    hisfut
    urecashf l
    owiscl
    osestt
    o:(M)
    b.$455,000. d.$390,000. G&N9e
    a.$6,000. c. $14,000.
    b.$4,763. d.$11, 114. G&N9e
    PresentValueofDepreci
    ati
    onTaxShiel
    d
    30.Acompanyant i
    cipat
    esadepr eci
    ati
    ondeduct i
    onof$20, 000inyear2ofa
    26.Acompanyant i
    cipat
    esataxabl
    ecashreceiptof$50,000i
    nyear3ofaproject.
    project
    .Thecompany 'staxrateis30% andi tsdiscountrat
    eis12%.The
    Thecompany'staxratei
    s30%anditsdiscountratei
    s14%.Thepresentvalue
    presentv al
    ueofthedepreci
    ati
    ontaxshieldresul
    ti
    ngf r
    om thi
    sdeducti
    oni
    s
    oft
    hisf
    uturecashf l
    owiscl
    osestt
    o:(M)
    closestto:(
    M)
    a.$10,125. c. $23,624.
    a.$11, 161. c. $6,
    000.
    b.$35,000. d.$15, 000. G&N9e
    b.$14, 000. d.$4,783. G&N9e

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page8of8
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    31.Acompanyant i
    cipat
    esadepreci
    ati
    ondeduct i
    onof$30, 000inyear3ofa 33.Acompanyneedsani ncr
    easei nworkingcapit
    alof$20,
    000inprojectt
    hat
    pr
    oject
    .Thecompany 'st
    axrateis30% andi tsdiscountrat
    eis12%.The willlast4y ears.Thecompany '
    st axr
    ateis30%andi t
    sdiscountr
    ateis10%.
    pr
    esentv al
    ueofthedepr
    eci
    ati
    ontaxshieldresul
    ti
    ngf r
    om thi
    sdeducti
    oni
    s Thepr esentvalueoft hereleaseoft hewor ki
    ngcapi
    talattheendoft he
    cl
    osestto:(
    M) projectisclosestto:(
    M)
    a.$21,000. c. $6,
    406. a.$6, 000. c. $9,562.
    b.$14,947. d.$9,000. G&N9e b.$13, 660. d.$14, 000. G&N9e

    32.Acompanyant i
    cipat
    esadepreci
    ati
    ondeduct i
    onof$70, 000inyear2ofa 34.Acompanyneedsani ncr
    easei nwor
    kingcapitalof$50,
    000i npr
    ojectt
    hat
    pr
    oject
    .Thecompany 'st
    axrateis30% andi tsdiscountrat
    eis14%.The willlast4y ears.Thecompany'staxr
    ateis30%andi tsdiscountr
    ateis8%.
    pr
    esentv al
    ueofthedepr
    eci
    ati
    ontaxshieldresul
    ti
    ngf r
    om thi
    sdeducti
    oni
    s Thepr esentvalueofthereleaseofthewor ki
    ngcapitalattheendoft he
    cl
    osestto:(
    M) projectisclosestto:
    (M)
    a.$16,159. c. $21,
    000. a.$36, 751. c. $25,
    726.
    b.$49,000. d.$37,704. G&N9e b.$15, 000. d.$35,000. G&N9e

    Pr esentValueofSal vageVal ue 35.Acompanyneedsani ncr


    easei nwor
    kingcapitalof$70,
    000i npr
    ojectt
    hat
    xx
    i
    .Thef ollowinginf ormat i
    onper t
    ainst
    oani nvestment: willlast3y ears.Thecompany'staxr
    ateis30%andi tsdiscountr
    ateis8%.
    Investment $120,
    000 Thepr esentvalueofthereleaseofthewor ki
    ngcapitalattheendoft he
    Annual r
    ev enues $70,
    000 projectisclosestto:
    (M)
    Annual variablecost s $15,
    000 a.$49, 000. c. $38,
    898.
    Annual f
    ixedout -of-
    pocketcosts $11,
    000 b.$21, 000. d.$55,568. G&N9e
    Salvagev alue $27,
    000
    Discountr ate 16% PresentValueofAnnui tyof1Comput ati
    on
    Expectedl if
    eofpr oject 3year
    s PresentValueofAnnui tyofDepr eciati
    onTaxShi eld
    Ignor
    ingincomet axes,thepresentval
    ueoft hesal
    vagev
    aluei
    s(r
    ounded)(
    E) 70.TheSal vageCo.i sconsi deringt hepur chaseofanew ocean- goi
    ngv essel
    a.$15, 673 c. $17,307 thatcouldpot ent
    iall
    yr educel aborcost sofitsoperationbyaconsi derable
    b.$17, 550 d.$23, 220 mar gi
    n.Thenewshi pwoul dcost$500, 000andwoul dbef ull
    ydepr eci
    atedby
    thestraight-l
    inemet hodov er10y ear
    s.Att heendof10y ears,theshipwi l
    l
    PresentValueofWor ki
    ngCapitalReleasedatEnd- of-
    Lif
    e havenov alueandwi l
    lbesunki nsomeal readypoll
    utedhar bor.TheSal v
    age
    77.Apr ojectunderconsi der
    ationbyt heWhi teCorp.wouldrequi r
    eawor king Co.'
    scostofcapi talis12per cent,andi tsmar gi
    naltaxratei s40per cent.
    capit
    ali nvestmentof$200, 000.Thewor ki
    ngcapi t
    alwoul
    dbel iquidatedat Whati st hepr esentv alueoft hedepreciati
    ont axbenefitoft henew shi p?
    theendoft heproj
    ect'
    s10- yearli
    fe.IfWhi teCorp.hasanaf ter-
    taxcostof (Roundt ot henearestdol l
    ar.)
    capit
    alof10per centandamar ginaltaxr ateof30per cent,whati st he a.$113, 004 c. $169,506
    presentv al
    ueoft heworki
    ngcapi talcashf l
    owexpectedtober eceivediny ear b.$282, 510 d.$200, 000 Barfi
    eld
    10?
    a.$36, 868 c. $53,970 78.BCompanyi sconsider
    ingtwoal t
    ernati
    veway stodepr eciat
    eapr oposed
    b.$77, 100 d.$23, 130 Barfi
    eld i
    nvestment
    .Theinvest
    menthasani niti
    alcostof$100,000andanexpect ed
    f
    ive-
    yearl
    if
    e.Thetwoalt
    ernat
    ivedepreci
    ati
    onschedulesfoll
    ow:
    Method1 Met hod2
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page9of9
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Year1depreciat
    ion $20,000 $40,
    000 i
    tisexpect edt
    ohav eanest i
    mat edsalvageval
    ueof$5,000.Overit
    s10- yearl i
    fe,
    Year2depreciat
    ion $20,000 $30,
    000 themachi neisexpectedt oproduce2, 000uni
    tsperyearwithaselli
    ngpr iceof
    Year3depreciat
    ion $20,000 $20,
    000 $500andcombi nedmat eri
    alsandl aborcostsof$450peruni t. Feder altax
    Year4depreciat
    ion $20,000 $10,
    000 regulat
    ionspermitmachinesoft hi
    sty petobedepr
    eci
    at edusi
    ngthestraight -
    li
    ne
    Year5depreciat
    ion $20,000 $0 met hodover5y earswit
    hnoest imatedsalvageval
    ue.Moor ehasamar ginaltax
    Assumingthatthecompanyf acesamar gi
    nalt axr
    ateof40percentandhas rateof40%
    acostofcapi talof10per cent,whatist hedi f
    fer
    encebet
    weent hetwo
    methodsinthepresentval
    ueofthedepreciat
    iontaxbenef
    it
    ? xxi
    v. Whati st
    henetcashout
    fl
    owatt hebegi
    nni
    ngofthef
    ir
    sty
    eart
    hatMoor
    e
    a.$7,196 c. $2,878 Cor
    porat
    ionshoul
    duseinacapi
    tal
    budgeti
    nganal
    ysi
    s?
    b.$0 d.$6, 342 Barf
    iel
    d a.$(85,
    000) c. $(
    96,
    000)
    b.$(90,
    000) e. $(
    105,
    000)
    PresentValueof1&Annui t
    yof1Comput ati
    on
    PresentValueofSal vageValue&Annual NetCashInflow xxv
    . Whati st
    henetcashfl
    owforthet
    hir
    dyearthatMoor
    eCor
    por
    ati
    onshoul
    d
    Quest i
    ons1and2ar ebasedont hefol
    l
    owinginfor
    mat i
    on. H&M usei
    nacapi
    tal
    budgeti
    nganal
    ysi
    s?
    Thef ol
    lowingi nformationpertai
    nstoaninvest
    ment : a.$68,
    400 c. $64,
    200
    Investment $70,
    000 b.$68,
    000 d.$79,000
    Annual revenues $48,
    000
    Annual variablecost s $16,
    000 xxv
    i. Whatisthenetcashfl
    ow f
    orthetenthyearofthepr
    ojectt
    hatMoor
    e
    Annual fi
    xedout -
    of-pocketcosts $10,
    000 Cor
    por
    ati
    onshoul
    duseinacapi
    tal
    budget
    inganal
    ysi
    s?
    Salvagev alue $6,
    000 a.$100,
    000 c. $68,
    400
    Discountr ate 12% b.$81,
    000 d.$63,000
    Expectedl ifeofproject 8year
    s
    Questions10t hrough13ar ebasedont hefollowi
    nginformat ion.
    xx
    ii
    .Ignor
    ei ncomet
    axes.Thepr
    esentv
    alueofthesalvagev
    aluei
    s(r
    ounded) Glei
    m
    a.$2, 424 c. $3,114 TheDi ckinsCor por ationisconsi deri
    ngt heacqui si
    ti
    onofanew machi neata
    b.$2, 869 d.$3, 224 costof$180, 000. Tr ansporti
    ng themachi net o Dickins’plantwillcostan
    addit
    ional$18,000.I thasa10- y
    earlif
    eandi sexpectedt ohav easalvagev alue
    xx
    ii
    i
    .Ignoreincometaxes.Thepr
    esentv
    alueoft heannualnetcashi
    nfl
    owsf
    rom of$10, 000.Fur ther mor e,themachi neisexpect edt opr oduce4, 000unitsper
    operati
    onsis(r
    ounded) yearwi thaselli
    ngpr iceof$500andcombi neddirectmat er
    ialsanddirectlabor
    a.$68, 411 c. $102,
    442 costsof$450peruni t.Feder altaxregulationspermitmachi nesofthistypet o
    b.$76, 269 d.$109,296 bedepr eci
    atedusi ngt hest r
    aight-
    li
    nemet hodov er5y earswi t
    hnoest i
    mat ed
    salv
    agev al
    ue.Di ckinshasamar ginalt
    axr ateof40%.
    Comprehensi
    ve
    Quest
    ions7through9ar ebasedont hefoll
    owinginf
    ormati
    on.CMA12954- 3to5 xxv
    ii. Whati sthenetcashout
    fl
    ow atthebegi nni
    ngoft
    hef
    ir
    sty
    eart
    hat
    TheMoor eCorporationisconsideri
    ngtheacquisit
    ionofanew machi ne.The Dickensshoul
    dusei
    nacapi
    tal
    budget
    inganaly
    sis?
    machi
    necanbepur chasedfor$90,000,i
    twil
    lcost$6,000t
    otransportt
    oMoor e’
    s a.$( 170,
    000) c. $(
    192,000)
    pl
    antand$9,000toi nst
    all
    .Iti
    sest i
    matedthatthemachinewil
    llast10year
    s,and b.$( 180,
    000) d.$(210,000)

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page10of10
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    xxv
    iii
    .Whati sthenetcashflow f
    orthethir
    dy earthatDi
    cki
    nsCor
    por
    ati
    on *
    . TheHabagatI nc.isplanningtospendP600, 000f oramachi nethatitwi l
    l
    shoul
    duseinacapi
    tal
    budgeti
    nganal
    ysi
    s? depreci
    ateonast rai
    ght-
    li
    nebasisoverat en-yearperiodwithnot erminal
    a.$136,800 c. $128,
    400 di
    sposalprice. Themachi newi
    llgenerat
    ecashf l
    ow fr
    om oper at
    ionsof
    b.$136,000 d.$107,400 P120,000ay ear.Ignoringi
    ncometaxes,whatist heaccounti
    ngrateofret
    urn
    onthenetiniti
    alinvestment?(M)
    xxi
    x. Whati sthenetcashflow f
    orthetenthyearoft
    hepr
    ojectt
    hatDi
    cki
    ns a.5% c. 10%
    shoul
    duseinacapit
    albudget
    inganal
    ysi
    s? b.12% d.15% RPCPA0595
    a.$200,000 c. $136,
    800
    xxx
    ii
    b.$158,000 d.$126,000 .
    A projectrequiresan invest
    mentof$80, 000 inequipment.Annualcash
    inf
    lowsof$16, 000ar eexpectedtooccurf orthenext8y ear
    s.Nosal v
    age
    xxx. Whati
    stheappr
    oxi
    mat
    epay
    backper
    iodont
    henewmachi
    ne? val
    uei sexpected.Thecompanyusest hestrai
    ght-
    li
    nemethodofdepreci
    ati
    on
    a.1.
    05year
    s. c. 1.
    33y
    ear
    s withnomi d-y
    earconvention.I
    gnor
    eincomet axes.
    b.1.
    54year
    s d.2.22y
    ear
    s Theaccount i
    ngr at
    eofreturnonori
    ginal
    investmentfort
    heproj
    ecti
    s( M)
    a.6. 25% c. 16.00%
    ACCOUNTI NGRATEOFRETURN b.7. 50% d.20. 00% H&M
    Numerator
    xxxi
    . Li n Co.isbuy ing machiner
    yi texpect s wi
    l
    lincrease aver
    age annual *
    . DoroCo.isconsideri
    ngt hepurchaseofa$100, 000machinethati
    sexpected
    operat
    ingincomeby$40, 000.Theini
    tialincr
    easeintherequir
    edinvestment toresul
    tinadecreaseof$25, 000pery earincashexpensesaftert
    axes.This
    i
    s$60, 000,andtheav erageincr
    easeinr equir
    edinvestmentis$30,000.To machine,whichhasnor esidualv
    alue,hasanest i
    mateduseful
    li
    feof10years
    comput etheaccrualaccounti
    ngrateofr etur
    n,whatamountshoul dbeused and wil
    lbe depr eci
    ated on a strai
    ght-l
    ine basis. Forthismachine,the
    asthenumer at
    orint herati
    o?(E) accounti
    ngrateofreturnbasedont heinit
    iali
    nvest mentwi
    ll
    be( M)
    a.$20, 000 c. $40,000 a.10% c. 25%
    b.$30, 000 d.$60, 000 b.15% d.35% AI
    CPA1189I I
    -40

    ARRonNetI nit
    ialInvest
    ment 68.(I
    gnoreincometaxesinthisprobl
    em. )TheJasonCompanyi sconsi
    deringthe
    CashFlowsGi v
    en, Ignor
    eIncomeTax purchaseofamachi net hatwi l
    lincreaserevenuesby$32, 000eachy ear
    .
    46.Ani nv
    est mentoppor tuni
    tycosti
    ng$150,000isexpectedtoyi
    eldnetcash Cashout f
    lowsforoperati
    ngthismachi newillbe$6,000eachy ear
    .Thecost
    fl
    owsof$45, 000annuallyforf
    iveyear
    s.Thecostofcapit
    ali
    s10%.Thebook ofthemachi neis$65,000.Itisexpectedtohav eausef ulli
    feoffiveyears
    rat
    eofr eturnwoul dbe(M) wit
    hnosal vageval
    ue.Forthi
    smachi ne, t
    hesimplerateofret
    urnis:(
    E)
    a.10%. c. 30%. a.20%. c. 49.
    2%.
    b.20%. d.33.3%. L&H10e b.40%. d.9.2%. G&N9e

    50.Ani nv
    estmentoppor t
    unit
    ycosti
    ng$80,000isexpectedt oyi
    eldnetcash OldMachi nehasScr apValue,NetCostSavings,I
    gnoreI
    ncomeTax
    fl
    owsof$25, 000annual
    lyforf
    ouryear
    s.Thecostofcapi
    tali
    s10%.Thebook 67.(Ignoreincomet axesi nthi
    spr obl
    em.)DennyCor por
    ationisconsi der
    ing
    rat
    eofr et
    urnwouldbe(M) replaci
    ng a technological
    l
    yobsol et
    emachi ne wit
    h a new stat
    e-of-
    the-
    art
    a.10. 0%. c. 21.
    3%. numer i
    call
    ycont rol
    ledmachine.Thenewmachi newoul
    dcost$450, 000and
    b.12. 5%. d.32.0%. L&H10e woul dhaveat en-yearusef
    ulli
    fe.Unfor
    tunat
    ely,
    thenewmachinewoul dhav e
    nosal vagevalue.Thenewmachi newoul dcost$20,
    000peryeartooper ate
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page11of11
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    andmaint
    ain,
    butwoul
    dsav e$100,000peryearinlaborandothercost
    s.The and wil
    lbe depreci
    ated on a st
    rai
    ght-
    li
    ne basis.Fort
    his machi
    ne,the
    ol
    dmachinecanbesoldnowf orscrapfor$50,000.Thesimpl
    er at
    eofret
    urn account
    ingrat
    eofret
    urnwouldbe(M)
    onthenewmachinei
    sclosestto:
    (M) a.10per cent
    . c. 30percent.
    a.8.75%. c. 7.78%. b.15per cent
    . d.35per cent. Bar
    fi
    eld
    b.20.00%. d.22. 22%. G&N9e
    72.MatCompany i s negotiat
    ing to purchase equi pmentt hatwoul d cost
    Aft
    er-t
    axCashFl owGi ven P200,000withtheexpect ati
    ont hatP40,000pery earcouldbesav edinaft
    er -
    *. BennyCompanyi spl anni
    ngt opurchaseanew machi nef orP600,000.The taxcashcostsift heequipmentwer eacqui r
    ed.Theequi pment ’
    sesti
    mat ed
    new machi newi l
    lbedepr eci
    ated ont hest r
    aight-
    li
    nebasi sov ersix-
    year usefull
    if
    eis10y ears,wit
    hnosal vagevalue, andwoul dbedepr eciat
    edbyt he
    peri
    odwi t
    hnosal vage,andaf ul
    lyear’
    sdepreciati
    onwi l
    lbet akenintheyear str
    aight-
    li
    nemet hod.Mat ’
    smi nimum desi redrateofr et
    urni s12%.Pr esent
    ofacquisit
    ion. Thenew machi nei sexpectedt oproducecashf l
    ow f
    rom val
    ueofanannui t
    yof1at12%f or10per iodsi s5.65.Presentv al
    ueof1due
    operati
    ons,netofincomet axes,ofP150,000ay earineachoft henextsix i
    n10per iodsat12%i s0.322.
    years.Theaccount ing(bookv al
    ue)rateofreturnont heinit
    ialinv
    estmentis Theav er
    ageaccr ualaccountingrateofr eturnduringthef i
    rstyearofasset ’
    s
    expectedtobe(D) useis
    a.16. 7% c. 8.
    3% A.20. 0% C.10. 0%
    b.12. 0% d.25. 0% RPCPA0598 B.10. 5% D.40. 0% PolBobadill
    a
    xx
    xii
    i
    . HookerOakFur nit
    ureCompanyi sconsi der
    ingt hepurchaseofwood Requi redInvestment
    cutt
    ingequipment .Dataont heequipmentareasf oll
    ows: ARRbasedonI ni
    tialInvestmentGiven
    xxx
    iv
    Ori
    ginalinvest
    ment $30,
    000 . TheMut y
    angPasi gCompany ,acalendarcompany ,purchasedanew
    Netannual cashinflow $12,
    000 machi nef orP280, 000onJanuar y1.Depr eciati
    onf ortaxpur poseswi l
    lbe
    Expectedeconomi cli
    feinyears 5 P35,000annual lyforeightyear
    s.Theaccount ing(bookv al
    ue)r ateofreturn
    Salvage value att he end off i
    ve $3,
    000 (ARR)i sexpect edtobe20%ont heini
    ti
    ali
    ncreaseinr equir
    edi nvest
    ment .On
    years theassumpt ionofauni for
    m cashi nfl
    ow,t hisinvestmenti sexpect edt o
    Thecompanyusest hest r
    aight
    -l
    inemethodofdepr eci
    ati
    onwithnomi d-
    year provideannual cashflowfrom operati
    ons,bef
    or e30per centincomet axes,of
    conventi
    on. (M)
    Whati stheaccount ingrateofr et
    urnonor i
    ginalinvest
    mentr oundedoffto A.P80, 000 C.P115, 000
    thenearestpercent,assumingnot axesar
    epai d?(D) B.P91, 000 D.P175, 000 Pol Bobadil
    la
    a.40. 0% d.24. 0%
    b.72. 7% e. 22.0% ARRbasedonAv erageInvest
    mentGi ven
    xxx
    v
    c. 20.0% H&M .TheZambal esCo.i splanningt o pur chaseanew machi newhi chi twil
    l
    depreci
    ateforbookpur poses,onast raight-
    li
    nebasi soverat en-
    y earperiod
    ARRonAv er
    ageI nvestment withnosal vagevalueandaf ullyear -
    ‘sdepreciati
    ont akenint hey earof
    CashFlowsGi ven,IgnoreI
    ncomeTax acquisi
    ti
    on. The new machi ne i s expected to productcash f low f r
    om
    66.MicrosoftCo.i sconsideri
    ngt hepur
    chaseofa$100,000machinet hati
    s operati
    ons,netofincomet axes,ofP175, 000ay earineachoft henextt en
    expectedtor esulti
    nadecr easeof$15,
    000peryeari
    ncashexpenses.Thi
    s years.Theaccounting(bookv alue)rateofr eturnont heaverageinv estment
    machine,whichhasnor esi
    dualval
    ue,
    hasanesti
    matedusef
    ull
    i
    feof10y ear
    s i
    sexpect edtobe15%.Howmuchwi l
    l t
    henewmachi necost?(M)
    A.P1, 000,
    000 C.P1, 666,667
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page12of12
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    B.P700,
    000 D.P1,
    800,
    000 Pol
    Bobadi
    l
    la
    92.Loui
    srecentl
    yinvestedinaprojectthathasanexpect
    edannualcashinf
    low
    RequiredLif
    e of$7,
    000f or10y ears,andanexpect edpaybackper
    iodof3.
    6y ear
    s.How
    83.TheI RVCompanyhasmadeani nvest
    menti nvi
    deoandr ecordi
    ngequipment muchdidLouisinvestinthepr
    oject
    ?
    thatcostsP106,700.Theequi
    pmenti sexpect
    edt ogenerat
    ecashi nf
    lowsof a.$19,444 c. $25,
    200
    P20,000pery ear.How manyy earswillt
    heequi pmenthavetobeusedt o b.$36,000 d.$40,000 Barf
    iel
    d
    providethecompanywi tha10% av erageaccount i
    ngrateofr et
    urnonits
    i
    nv estment
    ? Minimum Annual Before-t
    axOper at i
    ngCashSav i
    ngs
    A.7. 28years C.5.55y ears xxxvi
    .What neyCompanyi sconsi deri
    ngtheacqui sit
    ionofanew,mor eef f
    ici
    ent
    B.9. 05years D.4.75y ears. PolBobadi
    l
    la press.Thecostoft hepr essi s$360,
    000,andt hepresshasanest i
    mat ed6-
    yearlif
    ewi thzerosalvagev alue.What neyusesst r
    aight
    -l
    inedepreci
    ationfor
    Sensit
    ivi
    tyAnalysi
    s bothf i
    nancialreport
    ingandi ncomet axreportingpur posesandhasa40%
    *. LybenInc.isplanningtoproduceanewpr oduct .Todothis,itisnecessaryt
    o corporateincomet axr ate.Inev al
    uati
    ngequi pmentacqui si
    ti
    onoft hi
    st y
    pe,
    acquir
    e a new equi pmentt hatwil
    lcostt he company P100, 000. The What neyusesagoalofa4- yearpaybackperiod.TomeetWhat ney’
    sdesired
    esti
    mat edli
    feoft henewequi pmentisf i
    vey earswithnosal vagev al
    ue.The payback per i
    od,the pr ess mustpr oduce a mi nimum annualbef ore-
    tax
    esti
    mat edincomeandcost sbasedonexpect edsalesofP10, 000unit
    sper operati
    ngcashsav i
    ngsof( M)
    yearare: a.$90, 000 c. $114, 000
    Sales@ P10. 00perunit P100, 000 b.$110, 000 d.$150, 000 CMA12964-
    Costs@ P8. 00perunit 80, 000 13
    Netincome P 20, 000
    Theaccount i
    ngr ateofret
    urnbasedoni niti
    alinvest
    mentis20% xxxvi
    i.JasperCompanyhasa pay backgoalof3 y earson new equipment
    Whatwi l
    lbet heaccount i
    ngr ateofr eturnbasedoni nit
    iali nvest
    mentof acquisi
    ti
    ons.Anewsor t
    erisbeingev al
    uatedthatcosts$450,000andhasa
    P100,000ifmanagementdecr easei
    tssellingpriceofthenewpr oductby10%? 5-yearl
    ife.Strai
    ght-
    li
    nedepreci
    ationwillbeused;nosalvagei sant
    ici
    pat
    ed.
    (M) Jasperissubjecttoa40%incomet axrate.Tomeett hecompany ’
    spayback
    a.5% c. 15% goal.Thesortermustgeneratereducti
    onsi nannualcashoperati
    ngcostsof
    b.10% d.20% RPCPA1077 (M)
    a.$60, 000 c. $150,000
    PAYBACKPERI OD b.$100, 000 d.$190, 000 CMA06934- 30
    I
    nit
    ialInv estment
    *. APJ,I nc.isplanningt opur
    chaseanew machi nethatwilltakesixyearsto GivenNetI ncome, IgnoreIncomeTax
    recov ert hecost.Thenew machi neisexpectedt oproducecashf l
    ow fr
    om 62.(Ignoreincomet axesinthisproblem.)Jarv
    eyCompanyisstudyingapr oj
    ect
    oper ations,netofi ncometaxes,ofP4, 500ay earforthefir
    stt hr
    eeyearsof thatwoul dhav eat en-
    yearli
    feandwoul drequi
    rea$450,
    000inv est
    menti n
    thepay backper i
    odandP3, 500ay earofthelastthreeyearsoft hepayback equipmentt hathasnosal vagev alue.Theproj
    ectwoul
    dprovi
    deneti ncome
    period.Depr eci
    ationofP3,000ay earshallbechargedt oincomeoft hesix eachy earasf ollowsfortheli
    feoft heproj
    ect:
    yearsoft hepaybackper i
    od.Howmuchshal lt
    hemachi necost ?(M) Sales $500,
    000
    a.P12, 000 c. P24,
    000 Lesscashv ari
    ableexpenses 200,
    000
    b.P18, 000 d.noneoft hese RPCPA1087 Contri
    but i
    onmar gin 300,
    000
    Lessfixedexpenses:
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page13of13
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Fixedcashexpenses $150,
    000 i
    nvest
    mentis
    Depr eciat
    ionexpenses 45,
    000 195,
    000 a.0.4year
    s. c. $33,
    000.
    Netincome $105,
    000 b.2.5year
    s. d.someot hernumber
    . L&H10e
    Thecompany 'srequi
    redrateofr
    etur
    nis12%.Whati st
    hepay
    backperi
    odfor
    thi
    sproject?(E) 48.Aninvest
    mentoppor t
    uni
    tycost
    ing$200,000isexpect
    edt oy i
    eldnetcash
    a.3y ear s c. 4.
    28year
    s fl
    ow of$44,000 annual
    l
    yf orseven y
    ears. The payback peri
    od ofthe
    b.2y ear s d.9y ear
    s G&N9e i
    nvest
    mentis(E)
    a.0.22year
    s. c. 4.55y
    ears.
    82.TheSi lverbowlCompanyi sconsideri
    ngt hepur chaseofel ectroni
    cpi nball b.3.08year
    s. d.Someot hernumber. D, L&H9e
    machi nest oplaceinamusementhouses.Themachi neswoul dcostat otal
    ofP300, 000,hav eaneight-
    yearusefull
    ife,andhav eat otalsalvagev alueof 48.Aninvest
    mentoppor t
    unit
    ycost
    ing$100,
    000i sexpectedtoy i
    eldnetcash
    P20,000.Basedonexper iencewit
    hot herequi pment ,thecompanyest imates fl
    ows of$22,000 annual
    lyf
    orseven years.The payback peri
    od ofthe
    thatannualr ev
    enuesandexpensesassoci atedwi t
    ht hemachi neswoul dbe i
    nvest
    mentis(E)
    asfollows: a.0.22year
    s. c. 4.55years.
    Rev enuesf rom use P200,000 b.3.08year
    s. d.someot hernumber. L&H10e
    Lessoper ati
    ngexpenses
    xxx
    vii
    i
    Commi ssions to amusement P100, 000 . The neti niti
    alinvest
    mentf ora piece ofconstruct
    ion equi
    pmentis
    houses $1,000,
    000.Annualcashi nf
    lowsareexpect edtoi
    ncreaseby$200,000per
    I
    nsur ance 7,000 year.Theequipmenthasan8- y
    earusef
    ulli
    fe.Whatist
    hepay backperi
    od?(
    E)
    Depr eciat
    ion 35,000 a.8. 00years c. 6.00year
    s
    Mai ntenance 18,000 160,
    000 b.7. 00years d.5. 00year
    s Horngr
    en
    Oper atingIncome 40,
    000
    I
    gnor i
    ng t he effectofincome taxes,the pay backper iod fort he pinball 9.Af i
    rmi sev al
    uat
    ingaproposalwhichhasaniniti
    alinv
    est
    mentof$50,000and
    machi neswoul dbe( M) hascashf l
    owsof$15,000pery earforf
    ivey
    ear s.Thepaybackper
    iodofthe
    A.3. 73y ears. C.4. 0y ears. proj
    ectis( E)
    B.3. 23y ears. D.7. 5y ears. Pol Bobadill
    a A.1. 5y ears. C.3.3y ears.
    B.2y ears. D.4y ears. Gi
    tman
    GivenCashFl ow,I
    gnor
    eIncomeTax
    EvenCashFl ows *
    . Assumi ngthatcapit
    alr
    equirementfornewmachi ner
    yisP135,
    000;netsal
    eof
    44.Ani nvestmentopport
    unit
    ycosti
    ng$85,000i sexpect
    edt oy i
    eldnetcash presentequipment–P35, 000;av
    erageannualoperati
    ngcashf
    low–P25, 000.
    flows of$22,000 annual
    lyforfiv
    ey ears. The payback peri
    od ofthe Thepay backperiodwouldbe:(E)
    invest
    menti s(
    E) a.4y ears c. 5.
    4y ears
    a.0. 26years. c. $63,
    000. b.4. 5y ear
    s d.6.8y ears RPCPA1078
    b.3. 86years. d.Al l
    oftheabove. D,L&H9e
    64.(I
    gnoreincomet
    axesinthi
    sprobl
    em.)Acompanywith$800,000inoperat
    ing
    44.Aninv
    estmentoppor
    tuni
    tycost
    ing$55,
    000isexpect
    edt oy i
    eldnetcash assetsisconsi
    deri
    ngthepurchaseofamachi nethatcosts$75,000and
    fl
    ows of$22,
    000 annual
    lyforfi
    vey ear
    s.The payback peri
    od ofthe whichisexpectedtoreduceoperati
    ngcost
    sby$20, 000eachy ear
    .The
    paybackperi
    odfort
    hismachi
    neinyearsi
    scl
    osestt
    o:(E)
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page14of14
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.0.
    27year
    s. c. 3.
    75y ear
    s. smallautof ordeli
    veringprescri
    ptions.Theaut owaspur chasedf or$9, 000
    b.10.
    7year
    s. d.40y ears. G&N9e andwi llhavea6- yearusefullifeanda$3, 000sal
    vagev alue.Del iv
    er i
    ng
    prescr
    ipti
    ons( whi
    cht hepharmacyhasnev erdonebefore)shoul di ncrease
    xxxi
    x.Ani nvest
    mentprojectisexpect
    edt oyiel
    d$10, 000i
    nannualr evenues, grossrevenuesbyatl east$5,000pery ear.Thecostofthesepr escripti
    onst o
    wil
    lincur$2,000i
    nfixedcostsperyear,andrequir
    esaninit
    iali
    nvestmentof thephar macywi l
    lbeabout$2, 000pery ear .Thepharmacydepr eciatesal l
    $5,
    000.Gi venacostofgoodssol dof60%ofsal esandignori
    ngtaxes,what assetsusingthestraight-
    li
    nemet hod.Thepay backper
    iodf ortheaut ois: (
    E)
    i
    sthepay backper
    iodiny ear
    s?(M) a.3. 0years. c. 2.0year
    s.
    a.2. 50 c. 2.
    00 b.1. 8years. d.1. 2year
    s. G&N9e
    b.5. 00 d.1.25 CI
    A0586I V-
    25 45.Bryantisconsi deri
    ngani nvestmenti nanew cheese- cut
    tingmachineto
    repl
    acei tsexistingcheesecut ter.Infor
    mat ionontheexist
    ingmachineand
    65.(Ignorei ncome taxes i
    nt his pr
    oblem.)The Hi ggins Companyhas just thereplacementmachi nef oll
    ow:
    pur chasedapi eceofequipmentatacostof$120, 000.Thi
    sequipmentwil
    l Costofnewmachi ne P40,
    000
    reduceoper ati
    ngcost
    sby$40, 000eachy earfort henexteightyear
    s.This Netannual savingsinoper atingcosts 9,
    000
    equi pmentr epl
    acesoldequipmentthatwassol df or$8,000cash.Thenew Salvagev aluenowoft heol dmachi ne 6,
    000
    equi pmenthasapay backperiodof:(
    E) Salvagev alueoft heoldmachi nein8y ears 0
    a.8. 0years. c. 10.0year s. Salvagev alueoft henewmachi nein8y ears 5,
    000
    b.2. 8years. d.3. 0years. G&N9e Estimatedl i
    feoft henewmachi ne 8years
    xl
    Whati stheexpect edpay backper i
    odforthenewmachi ne?(M)
    . Hai
    gAi rcr
    aftisconsi
    deri
    ngapr oj
    ectwhichhasanup- fr
    ontcostpai
    dtodayat A.4. 44y ear
    s. C.6. 50year
    s.
    t=0.Thepr oj
    ectwil
    lgenerat
    eposi t
    ivecashflowsof$60,000ay earatthe B.2. 67y ear
    s. D.3. 78year
    s. PolBobadi
    ll
    a
    endofeachoft henextf i
    veyears. Thepr oj
    ect’
    sNPVi s$75,000andt he
    company ’
    s WACC i s 10 per
    cent. Whati sthe proj
    ect’
    s si
    mple,regul
    ar 44.Sal
    ve Company i s consi
    dering an investmenti n a new cheese-cutt
    ing
    payback?(M) machinetor eplaceitsexist
    ingcheesecut ter
    .I nfor
    mati
    onont heexi st
    ing
    a.3. 22years d.2. 35years machineandt hereplacementmachi nefoll
    ow:
    b.1. 56years e. 4.16years Costofthenewmachi ne P100,000
    c. 2.54years Bri
    gham Netannual savi
    ngsinoper ati
    ngcosts 20,
    000
    xl
    i Sal
    vagev aluenowoft heol dmachine 10,
    000
    .Demi ng,I
    nc.isconsideri
    ngt hepurchaseofproductionequipmentthatcosts Sal
    vagev alueoftheoldmachi nein8y ears 0
    $600,000.Theequi pmenti sexpect edtogener at
    eannualcashi nflowsof Sal
    vagev alueofthenewmachi nein8y ears 20,
    000
    $200,000andhav eausef ulli
    feof5y earswit
    hnosal v
    agev al
    ue.Thef ir
    m’s Esti
    matedl i
    feofthenewmachi ne 8y ears
    costofcapi t
    ali
    s14per cent.Thecompanyusest hest r
    aight
    -l
    inemet hodof
    Whatistheexpect edpaybackper i
    odforthenewmachi ne?
    depreciat
    ionwit
    hnomi d-yearconv
    ent i
    on.I
    gnoreincomet axes.
    a.4.00y ear
    s c. 4.50y ear
    s
    Paybackf ort
    heprojectis
    b.4.33y ear
    s d.5. 00years Pol Bobadill
    a
    a.5. 00years c. 3.
    00y ears
    b.3. 50years d.2.38y ears H&M
    UnevenCashFlows
    xl
    i
    i
    .I
    faninit
    ialinv
    est
    mentout
    layi
    s$60,
    000andt
    hecashf
    lowspr
    oject
    edar
    e
    63.(
    Ignor
    eincometaxesi
    nthi
    spr
    obl
    em.
    )Buy
    -Ri
    tePhar
    macyhaspur
    chaseda
    CMAEXAMI NATIONQUESTI
    ONS Page15of15
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $15,000,$20,
    000,$25,000,and $10,
    000 i
    n each oft
    he f
    ir
    stf
    oury
    ear
    s, 2 300 700
    respecti
    vel
    y,t
    hepaybackperi
    odinyear
    swouldbe:(E) 3 500 1,
    200
    A.3. 3 D.4.0 4 200 1,
    400
    B.3. 0 E.5.0 a.2years. c. 2.
    86year
    s.
    C.2. 5 C&U b.2.
    60years. d.3y ear
    s. CI
    A1187I
    V-
    19
    8.Afir
    mi sevaluat
    ingaproposalwhichhasaninit
    ialinvest
    mentof$35,
    000and
    hascashf l
    owsof$10,000iny ear1,$20,
    000iny ear2,and$10,
    000inyear3. *
    . Gi
    venthesedata:
    Thepaybackperiodoftheproj
    ectis(E)  Netaftertaxinflowsare:P24,000foryear1,P30,000f
    ory
    ear2,P36,
    000
    A.1y ear. C.between1and2y ear
    s. foryear3,andP30, 00foryear4.
    B.2y ears. D.between2and3y ear
    s. Gi tman  Ini
    ti
    alinvest
    mentout layisP60,
    000.
     Costofcapitalis18%
    xl
    i
    ii
    .TheSeattleCorporati
    onhasbeenpr esentedwi t
    hani nvestmentopportunit
    y Det
    erminethepay backperiodfort
    hisi
    nvestment(E)
    whichwillyi
    eldcashf l
    owsof$30,000pery earinYear s1through4,$35,000 a.2.50years. c. 3.00years.
    peryearinYears5t hr
    ough9,and$40, 000inYear10.Thi sinvest
    mentwi ll b.2.17years. d.3. 17years. RPCPA0594
    costthef i
    rm $150,000today,andthef i
    rm’scostofcapi talis10per cent.
    Assumecashf l
    owsoccurev enlydur
    ingthey ear,1/365t
    heachday .Whati s 66.(I
    gnorei ncomet axesi nt hisprobl
    em.)TheKeegoCompanyi splanninga
    thepaybackperiodforthi
    sinvest
    ment?(E) $200,000equi pmenti nvestmentthathasanesti
    matedfiv
    e-yearli
    fewithno
    a.5.23y ears d.6.12y ears esti
    mat edsal vagev alue.Thecompanyhaspr oj
    ectedthefoll
    owingannual
    b.4.86y ears e. 4.
    35y ears cashf l
    owsf ortheinv estment .
    c. 4.
    00y ears Br
    igham Year CashInfl
    ows
    1 $120,000
    xl
    i
    v
    .MichiganMat tr
    essCompanyi sconsi deri
    ngt hepur chaseofl andandt he 2 60,000
    constructionofanewpl ant
    .Theland, whichwoul dbeboughti mmedi atel
    y(at 3 40,000
    t=0) ,hasacostof$100, 000andt hebui l
    ding, whichwoul dbeer ectedatt he 4 40,000
    endoft hef i
    rstyear(t=1),wouldcost$500, 000.I tisestimatedt hatthe 5 40,000
    fi
    rm’saf ter-
    taxcashfl
    owwi l
    lbeincreasedby$100, 000st ar
    ti
    ngatt heendof Total $300,000
    thesecond y ear,andthatthi
    si ncrement alf low woul dincreaseata10 Assumi ngt hatt hecashi nf
    lowsoccurevenl
    yov ertheyear,thepayback
    percentr ateannuallyoverthenext10 y ears. Whati st heappr oximate peri
    odf ortheinvestmenti s:(
    E)
    paybackper iod?(M) a.0. 75y ears. c. 4.
    91years.
    a. 2y ears d. 8y ear s b.1. 67y ears. d.2.50years. CMAadapt ed
    b. 4y ears e. 10y ears
    c. 6y ears Br i
    gham *
    . Sweets,
    Etc.
    ,Inc.pl
    anstoundert
    akeacapit
    alexpenditur
    erequi
    ri
    ngP2mil
    li
    on
    cashoutl
    ay.Bel ow ar
    etheproj
    ectedaf
    ter-
    taxcashi nfl
    ow f
    orthef
    ivey
    ear
    xl
    v.Amachinecosti
    ng$1,000producestot
    al cashinf
    lowsof$1,
    400over4year
    s. peri
    odcover
    ingtheusefull
    i
    fe.Thecompany’staxrateis35%.
    Det
    erminethepaybackperi
    odgivent
    hef oll
    owingcashfl
    ows:(E) Year P’000
    Year Aft
    er-
    TaxCashFlows Cumulati
    veCashFlows 1 600
    1 $400 $ 400
    CMAEXAMI NATIONQUESTI ONS Page16of16
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    2 700 2 20,
    000
    3 480 3 30,
    000
    4 400 4 20,
    000
    5 400 5 30,
    000
    Thef ounderandpr esidentoft hecandycompanybel i
    evest hatt hebest Whatist
    hepay
    backper
    iodi
    nyear
    s,assumingnot
    axesarepai
    d?
    gaugef orcapit
    alexpenditur
    eiscashpay backperiodandt hatt her ecovery a.4.00 d.3.85
    peri
    odshoul dnotbemor ethan75% oft heusefullif
    eoft hepr ojectorthe b.4.33 e. 3.
    33
    asset.Shouldthecompanyunder t
    aket hepr oj
    ect?(M) c. 5.
    00 H&M
    a.No,si ncethepay backper i
    odi s4y earsor80% oft heusef ullifeofthe
    proj
    ect. *
    . Acompanyhast woprojects–ProjectZoom andPr ojectOz.Thet ablebel
    ow
    b.Yes, sincethepaybackperiodis3. 55y earsor71%oft heusef ullif
    eofthe showstheproj
    ectedcashf l
    owsforthefir
    stfi
    vey earsoft heproj
    ect.
    proj
    ect. Proj
    ectZoom ProjectOz
    c. No,sincethepaybackper i
    odext endsbey ondthel i
    feofthepr oject. Year0 -
    10,
    000 -
    15, 000
    RPCPA1096 Year1 +4,
    000 +7, 600
    d.Yes,si ncethepay backperi
    odi s4y earsandst i
    llshort
    ert hant heuseful Year2 +2,
    000 +3, 500
    li
    feoftheproject
    . Year3 +1,
    500 +3, 900
    xl
    vi
    Year4 +2,
    500 +2, 000
    .MonckManagementSer vi
    cesisconsider
    inganinvest
    mentof$30, 000.Dat
    a Year5 +3,
    000 +1, 000
    rel
    atedtotheinvest
    mentareasfoll
    ows: Given t
    he dat
    a above,comput et he numberofy ear s wi
    thi
    n which the
    Year CashInflows companymaybeabl etorecoupbacki t
    sinvest
    ment sf rom bothproj
    ects:
    1 $10,000 a.4y ears;
    3years c. 5years,3y ears
    2 12,
    000 b.4y ears;
    5years d.5y ears,5y ears RPCPA1091
    3 15,
    000
    xl
    vi
    ii
    4 20,
    000 .
    For$45,000,HarmonCompanypur chasedanewmachi newi t
    hanest imated
    5 10,
    000 usefull
    ifeoffiveyear
    swi t
    hnosal vagev al
    ue.Themachi neisexpect edto
    Costofcapit
    al i
    s18percent. producecashflowfrom oper
    ati
    ons,netofincometaxes,asfol
    lows:
    Whati sthepay backperi
    odi nyearsapproxi
    matedtot wodeci malpoint
    s 1styear $9, 000
    assumingnotaxesar epai
    d? 2dyear 12,
    000
    a.3. 00 d.2.22 3dyear 15,
    000
    b.2. 00 e. 5.
    00 4thyear 9,
    000
    c. 2.53 H&M 5thyear 8,
    000
    xl
    vi
    i
    Harmonwi llusethesum- of
    -t
    he-y
    ear s-
    digi
    ts'met
    hodt odepreciatethenew
    .HandyProducts Companywas consi der
    ing t
    he purchase ofequipment
    . machineasf ol
    lows:
    Det
    ail
    sont heequi
    pmentar easfoll
    ows: 1styear $15,000
    Year Ori
    ginalI
    nvestment CashInf
    lowf r
    om Operat
    ions 2dyear 12,
    000
    0 $100,000 3dyear 9,
    000
    1 $20,000 4thyear 6,
    000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page17of17
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    5thyear 3,
    000 Cal
    cul
    ateBr
    avo,
    Inc.
    ’
    spay
    backr
    eci
    procal
    fort
    hisi
    nvest
    ment
    :(E)
    Whati
    sthepay
    backper
    iod?(
    E a.20.5% c. 11.
    9%
    A.3years C.5y
    ear
    s b.18.3% d.22.2% RPCPA0594
    B.4years D.2y
    ear
    s AI
    CPAadapt
    ed
    Payback&PaybackReci
    procal
    Gi
    v enBeforeTaxCashFl ow Questi
    ons48and49arebasedont
    hefoll
    owingi
    nfor
    mation. RPCPA0591
    EvenCashFl ows I
    famachi necostsP5,
    000andwil
    lgenerat
    eannualcashinfl
    owsofP1,000f
    or
    *. Mar yCompanyr ecentlyacquiredamachi neatacostofP64, 000.I twil
    lbe thenext8year
    s,
    depreci
    at ed on a straight-
    li
    ne basis overeighty ear
    swi th no esti
    mated
    salvagev al
    ue. Maryest i
    matest hatt hi
    swi l
    lproduceanannualnetcash *
    . Whati
    sthepay
    backper
    iod?
    inf
    low (bef or
    eincomet axes)ofP18, 000.Assumi ngani ncomet axrateof a.8years c. 6y
    ear
    s
    35%, whati stheapproximatepay backper i
    odforthisinvest
    ment ?(
    E) b.5years d.3year
    s
    a.4. 4y ears. c. 7.1years.
    b.12. 8y ears. d.3. 6years. RPCPA0598 *
    . Whati
    sthepay
    backr
    eci
    procal
    ?(E)
    a.125% c. 20%
    xl
    i
    x. Fi tzgeral
    dCompanyi splanni
    ngt oacquirea$250, 000machinet
    hatwil
    l b.15% d.33%
    prov i
    dei ncreasedeffi
    cienci
    es,therebyreducingannualoperati
    ngcostsby
    $80,000.Themachi newi l
    lbedepreciat
    edbyt hestrai
    ght-
    li
    nemethodovera5 Questions71t hr
    ough73ar ebasedont hefoll
    owinginformati
    on.
    -
    y earlifewi t
    hnosalvagev al
    ueattheendof5y ears.Assuminga40%income Glei
    m
    taxr ate,themachine'
    spay backperi
    odis( E) Hender sonInc.haspurchasedanew f leetoftr
    uckst odeli
    veritsmerchandise.
    A.3. 13y ears. C.3.68y ears. Thet r
    uckshav eausefulli
    feof8y earsandcostat otalof$500,000.Henderson
    B.3. 21y ears. D.4.81y ears. CMA06914- expectsi t
    snexti ncr
    ease in aft
    er-t
    axcash f l
    ow t o be $150,000 i
    n Year1,
    16 $175,000inYear2,$125, 000inYear3,and$100, 000ineachoft heremaini
    ng
    years.
    l
    . JordanCompanyi sconsi
    deri
    ngthepurchaseofanewmachi nef
    or$200,000.
    Themachi negenerat
    esannualr
    evenuesof$125,000andannual
    expensesof l
    i
    .Ignori
    ngthetimev al
    ueofmoney
    ,howlongwillittakeHender
    sont
    orecov
    er
    $75,000whichincl
    udes$15,000ofdepreci
    ati
    on.Whatisthepaybackperi
    od theamountofinv
    estment
    .
    i
    ny earsonthemachineapproxi
    matedtoonedecimalpoint
    ? a.3.5years. c. 4.
    2y ears.
    a.1. 6 d.1. 7 b.4.0years. d.5y ears.
    b.3. 1 e. 2.1
    c. 4.0 H&M l
    i
    i.Whati
    sthepay
    backr
    eci
    procal
    fort
    hef
    leetoft
    rucks?
    a.29% c. 24%
    PaybackReciprocal b.25% d.20%
    *. Thepay backr eci
    procalisanest i
    mat eoftheinternalrat
    eofr et
    urn. The
    Bravo,
    Inc.isconsideri
    ngt heacquisit
    ionofamer chandisepicki
    ngsyst
    em to l
    i
    ii
    .Assumet henetcashf lowt
    obe$130,
    000ay ear.Whati
    sthepaybackt
    ime
    i
    mpr ovecustomerser vi
    ce.Annualcashr etur
    nsoni nvestmentcostofP1.2 fort
    hefleetoftrucks?
    mill
    i
    onisP220, 000.Usef ulli
    feisestimatedat8y ears.Thecompany ’
    scost a.3y ears. c. 3.
    85y ear
    s.
    ofcapi
    talis14%andi ncomet axrat
    eis35%. b.3.15y ears. d.4y ears.
    CMAEXAMI NATIONQUESTI ONS Page18of18
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    DI
    SCOUNTEDPAYBACK
    BAILOUTPAYBACK EvenCashFl ow
    37.Themanuf actureoffoli
    cacidisacompet it
    ivebusi
    ness.Anewpl antcosts l
    v.Coughl i
    nMot orsi
    sconsi
    der
    ingapr
    ojectwit
    ht hefol
    lowingexpect
    edcash
    $100,000andl astsf orthr
    eey ear
    s. Thecashf l
    ow from thepl antisas fl
    ows:
    fol
    lows:Year1:+43,300,Year2:$43,300andYear3=58, 300.Ift
    hesal vage Year Proj
    ectCashFlow
    val
    ueoft heplantattheendofyear1i s$80,
    000,wouldyouscr aptheplantat 0 -
    $700mill
    i
    on
    theendofy ear1?Assumet her
    ei snotax. 1 200mill
    i
    on
    A.Yes C.Needmor einformation 2 370mill
    i
    on
    B.No D.Don'tknow B&M 3 225mill
    i
    on
    4 700mill
    i
    on
    40.Themanuf actureoffoli
    cacidisacompet it
    ivebusi
    ness.Anewpl antcosts Theproject
    ’sWACCis10per
    cent
    .Whatistheproj
    ect’
    sdiscount
    edpay back?
    $100,000andl astsf orthr
    eey ear
    s. Thecashf l
    ow from thepl antisas (M)
    fol
    lows:Year1:+43,300,Year2:$43,300andYear3=58, 300.Ifthesalvage a.3.15y ears d.2. 58years
    val
    ueoft heplantattheendofyear2i s$60,
    000,wouldyouscr aptheplantat b.4.09y ears e. 3.09years Brigham
    theendofy ear2?Assumet her
    ei snotax. c. 1.
    62y ears
    A.Yes C.Don'tknow
    B.No D.Needmor einformation B&M UnevenCashFl ow
    17.Giv
    enthef oll
    owi
    ngcashfl
    owsf
    orproj
    ectZ:C0=-2,000,C1=600,
    C2=2160
    39.Themanuf actureoffoli
    cacidisacompet it
    ivebusi
    ness.Anewpl antcosts andC3=6000,cal cul
    atet
    hedi
    scount
    edpaybackper i
    odfort
    heproj
    ectata
    $100,000andl astsf orthr
    eey ear
    s. Thecashf l
    ow from thepl antisas di
    scountrateof20%.(
    E)
    fol
    lows:Year1:+43,300,Year2:$43,300andYear3=58, 300.Ifthesalvage A.Oney ear C.3y ear
    s
    val
    ueoft heplantattheendofyear2i s$40,
    000,wouldyouscr aptheplantat B.2y ear
    s D.Noneoft heabove B&M
    theendofy ear2?Assumet her
    ei snotax.
    A.Yes C.Don'tknow l
    vi
    .Aprojecthasthefol
    l
    owingcashfl
    ows:
    B.No D.Needmor einformation B&M Year ProjectCashFl ow
    0 -$3,000
    l
    i
    v.Womar kCompanypur chasedanew machi neonJanuar y1oft hisyearf or 1 1,000
    $90,
    000,wi t
    hanest i
    mat edusef ullif
    eof5y earsandasal vagev alueof 2 1,000
    $10,
    000. Themachi newi l
    lbedepr eciat
    edusi ngt hestr
    aight-
    li
    nemet hod. 3 1,000
    Themachi neisexpected t o producecashf low from operati
    ons,netof 4 1,000
    i
    ncomet axes,of$36,000ay earineachoft henext5y ears. Thenew It
    scostofcapi t
    alis10percent
    .Whatistheproj
    ect
    ’sdiscountedpay back
    machine’ssalvageval
    ueis$20, 000i nyears1and2, and$15,0000i nyears3 peri
    od?(E)
    and4.Whatwi llbet
    hebai l
    outper i
    od(rounded)f ort
    henewmachi ne?(E) a.3. 00year
    s d.3.75year
    s
    a.1.4y ears. c. 1.9year s. b.3. 30year
    s e. 4.
    75year
    s
    b.2.2y ears. d.3. 4year s. AICPA0582I -
    36 c. 3.52year
    s Brigham
    l
    vi
    i
    .Ll
    oydEnt
    erpr
    iseshasapr
    ojectwhi
    chhast
    hef
    oll
    owi
    ngcashf
    lows:

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page19of19
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Year Pr
    ojectCashFl
    ow 3 40,
    000 30,
    000
    0 -$200,
    000 4 30,
    000 0
    1 50,
    000 Whi
    chinvest
    mentproj
    ect
    (s)doesthecompanyi nv
    esti
    n?(
    M)
    2 100,
    000 a.Proj
    ectAonly. c. Pr
    ojectAandProj
    ectB.
    3 150,
    000 b.Neit
    herProj
    ectAnorProj
    ectB. d.Pr ojectBonl
    y. Br
    igham
    4 40,
    000
    5 25,
    000 NETPRESENTVALUE
    Thecostofcapi
    tali
    s10per
    cent
    .Whati
    st hepr
    oject
    ’sdi
    scountedpayback? NetInit
    ial I
    nvestment
    (M) EvenCashI nfl
    owsGiven,IgnoreI
    ncomeTaxes
    l
    x
    a.1.8763year
    s d.2.4793year
    s . ShirtCompanywant stopurchaseanewcut t
    ingmachinefori
    tssewingpl ant
    .
    b.2.0000year
    s e. 2.
    6380year
    s Thei nvestmentisexpectedtogenerat
    eannual cashinfl
    owsof$300,000.The
    c. 2.
    3333year
    s Bri
    gham requiredrateofret
    ur nis12%andt hecur r
    entmachineisexpect
    edtol astfor
    foury ears.Whatist hemaxi mum dol l
    aramountShi rtCompanywoul dbe
    l
    vi
    ii
    .PolkProduct
    sisconsider
    inganinvestmentpr
    ojectwi
    ththefoll
    owi
    ngcash will
    ingt ospendforthemachi ne,
    assumi ngitsli
    fei
    salsofouryear
    s?Income
    fl
    ows: taxesar enotconsidered.(
    M)
    Year Proj
    ectCashFl
    ow a.$507, 000 c. $791,740
    0 -
    $100,
    000 b.$720, 600 d.$911, 100 Hor ngren
    1 40,
    000
    2 90,
    000 54.(Ignor
    ei ncome taxes inthis probl
    em. )Stratfor
    d Companypur chased a
    3 30,
    000 machinewi thanest i
    mated usefulli
    feofsev eny ear
    s.Themachi newil
    l
    4 60,
    000 generatecashinfl
    owsof$90, 000eachy earoverthenextsevenyears.I
    fthe
    The companyhas a 10 percentcostofcapi t
    al. Whatisthe pr
    oject
    ’s machinehasnosal vagevalueatt heendofsev enyear
    s,andassumi ngthe
    di
    scountedpayback?(
    M) company '
    sdiscountrateis10%, whatisthepur chasepr
    iceofthemachi nei
    f
    a.1.67y ear
    s d.2.49years thenetpresentval
    ueoft heinvest
    menti s$170,000?(M)
    b.1.86y ear
    s e. 2.
    67years a.$221, 950. c. $268, 120.
    c. 2.
    11y ear
    s Bri
    gham b.$170, 000. d.$438, 120. G&N9e
    l
    i
    x
    .DavisCorporati
    onisfacedwi t
    ht woi ndependentinvestmentoppor t
    un-i
    ti
    es. EvenAf t
    er-taxCashFl owsGiven
    Thecorporati
    onhasani nv
    estmentpol i
    cywhichrequiresacceptableproj
    ects *. GarwoodCompanyhaspur chasedamachi net hatwillbedepr eci
    atedont he
    torecoverallcostswithi
    n3y ears.Thecor por
    ationusest hedi scounted str
    aight-li
    nebasi soveranest imatedusef ull
    ifeof7y earswithnosal vage
    paybackmet hodtoassesspot entialprojectsandut i
    l
    izesadi scountrat
    eof val
    ue.Themachi neisexpectedtogener atecashf lowf rom operati
    ons,net
    10percent.Thecashfl
    owsf orthet wopr ojectsar
    e: ofincomet axes,of$80,
    000i neachoft he7y ear s.Gar wood’sexpectedrate
    Year ProjectACashFl ow Proj
    ectBCash ofreturni s12%.I nf
    ormati
    ononpr esentvaluefact or
    si sasf ol
    l
    ows:
    Fl
    ow Pr esentvalueof$1at12%f orsevenper i
    ods 0.452
    0 -$100,000 -
    $80,000 Pr esentv al
    ueofanor dinaryannuityof$1at12% f or 4.564
    1 40,000 50,000 sev enperiods
    2 40,000 20,000 Assumi ngaposi ti
    venetpresentvalueof$12, 720,whatwast hecostoft he
    machi ne?( M)
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page20of20
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$240,
    400 c. $352,
    400 b.P3,
    524,
    000 d.P3,
    778,
    400 RPCPA1095
    b.$253,
    120 d.$377,840 AI
    CPA1181I
    -39
    *
    . OnJanuar y1,acompanyi nvest
    edi nanassetwi thausefulli
    feof3y ears.
    *
    .I ti
    st hest artoft hey earandSt .TropezCo.pl anstorepl
    aceitsoldsing-
    along Thecompany ’sexpect edrateofr eturnis10%.Thecashf l
    ow andpresent
    equipment .Thesei nformationareav ai
    labl
    e: andf utureval
    uefactorsf orthe3year sareasfoll
    ows:
    Old New CashI nflow PresentValue Fut
    ureValue
    Equi pmentcost P70,000 P120,000 Year Fr om t heAsset of$1at10% of$1at10%
    Cur rentsal vagev alue 10,000 - 1 $8, 000 .
    91 1.10
    Sal vagev al
    ue, endofusef ulli
    fe 2,000 16,000 2 9,000 .
    83 1.21
    Annual oper ati
    ngcost s 56,000 38,000 3 10,000 .
    75 1.33
    Accumul ateddepr eciati
    on 55,300 - Allcashi nf
    lowsareassumedt ooccuraty ear
    -end.Ift
    heassetgenerat esa
    Est i
    mat edusef ulli
    fe 10years 10y ear
    s positi
    venetpr esentv alueof$2, 000,whatwast heamountoft heoriginal
    Thecompany ’
    si ncomet axrateis35%andi t
    scostofcapitalis12%.Whati s i
    nv estment?
    thepr esentv alueofal ltherelevantcashf l
    owsatt imezer
    o?( D) a.$20, 250 c. $30,
    991
    a.( P54, 000) c. (P120,000) b.$22, 250 d.$33,991 CIA1185IV-24
    b.( P110, 000) d.( P124,700) RPCPA0594
    RequiredSal vageValue
    UnevenCashInfl
    owsGi ven,I
    gnoreIncomeTaxes 105. Cr amden Ar mor ed CarCo.i s considering the acqui sit
    ion ofa new
    50.(I
    gnor
    ei ncome t axes int hi
    s probl
    em. )Hor n Corporat
    ion i
    s consideri
    ng armor ed truck.Thet rucki sexpect ed t
    o cost$300, 000.The company '
    s
    i
    nvest
    inginaf our-
    y earpr
    oject.Cashinfl
    owsf rom t
    hepr oj
    ectareexpectedto discountr ateis12per cent .Thefi
    rm hasdet erminedt hatthet ruckgenerates
    beasfoll
    ows:Year1, $2,
    000;Year2,$2,200;Year3,$2,400;Year4,$2,600.If aposi tivenetpresentv alueof$17,022.Howev er,thef i
    rmi suncer t
    ainast o
    usi
    ngadi scountr ateof8%,t heproj
    ecthasaposi tiv
    enetpr esentvalueof whet herithasdet ermi nedar easonableestimat eoft hesal vagev al
    ueoft he
    $500,
    whatwast heamountoft heori
    ginalinv
    estment?( M) tr
    uck.I ncomput i
    ngt henetpr esentv al
    ue,t hecompanyassumedt hatthe
    a.$1,411. c. $7,
    054. tr
    uckwoul d besal vaged att heend oft hef ifthy earf or$60, 000.What
    b.$2,411. d.$8,054. AICPAadapt ed expect edsalvagev al
    uef orthetr
    uckwoul dcauset hei nvestmentt ogenerate
    anetpr esentval
    ueof$0?I gnor
    etaxes.(D)
    NetPresentVal ueGi v
    en a.$30, 000 c. $55,278
    *. McIndonCor porati
    onboughtamaj orequipmentwhi chisdepreciableover7 b.$0 d.$42, 978 Barfi
    eld
    yearsonast r
    aight-l
    inebasi swi t
    houtanysal vagev al
    ue.I ti
    sestimatedthati
    t
    woul dgeneratecashf l
    owf r
    om oper at
    ions,netofi ncomet axes,ofP800,000 RequiredAnnual CashFlows,IgnoreIncomeTaxes
    i
    neachoft hesev eny ears.Thecompany ’
    sexpect edr ateofreturnis12%. NPVi sZer o
    l
    xi
    Basedonest i
    mat es, t
    hepr ojecthasanetpr esentvalueofP127,200.Whati s .Inv estmentAr equi
    resaneti nvestmentof$800,000.Therequir
    edrateof
    thecostoft heequi pment ?(E) ret
    ur nis12%f orthefour
    -yearannuit
    y.Whataretheannual
    cashinf
    lowsift
    he
    Tof aci
    li
    tatecomput ati
    ons,bel owarepr esentvaluefactors: netpr esentval
    ueequals0?( r
    ounded)(M)
    Presentv al
    ueofP1at12%f orsev enyearsis0. 452. a.$189, 483 c. $274,
    848
    Presentv al
    ueofanor dinaryannui t
    yofP1at12%f orsev enyearsis4.564. b.$263, 418 d.$295,733 Horngr
    en
    a.P3, 651,200 c. P2,404,000
    71.Sal
    vageCo.i
    sconsi
    der
    ingt
    hepur
    chaseofanew ocean-
    goi
    ngv esselt
    hat
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page21of21
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    couldpotenti
    all
    yreducelaborcost sofitsoperat
    ionbyaconsi derabl emar gin. fl
    owsassociat
    edwi t
    hjustthetangi
    blecostsandbenef i
    tsisanegative
    Thenew shi pwoul dcost$500, 000andwoul dbef ul
    lydepr eciatedbyt he $184,
    350.How l
    argewouldt
    heannualnetcashi nfl
    owsf r
    om theint
    angi
    ble
    str
    aight-
    li
    nemet hodov er10y ear
    s.Att heendof10y ears,theshi pwi llhave benef
    it
    shavetobetomakethisafi
    nanci
    all
    yacceptablei
    nvestment
    ?(M)
    nov al
    ueandwi llbesunki nsomeal r
    eadypol l
    utedhar bor.TheSal vageCo. '
    s a.$18,435. c. $35,
    000.
    costofcapi t
    alis12per cent ,anditsmar gi
    naltaxr ateis40per cent.Ifthe b.$30,000. d.$37,236. G&N9e
    shi
    ppr oducesequalannuall aborcostsav i
    ngsov eri
    ts10-y earli
    fe, howmuch
    dot heannualsav i
    ngsi nlaborcost sneedt obet ogener ateanetpr esent RequiredLife
    val
    ueof$0ont heproject?(Roundt othenearestdoll
    ar .
    )(M) 106. BookerSt eelI
    nc.i
    sconsi
    deringaninvestmentthatwoul
    drequir
    eani ni
    tial
    a.$68, 492 c. $88,
    492 cashout layof$400,
    000andwoul dhav enosalvageval
    ue.Theprojectwould
    b.$114, 154 d.$147,487 Barfi
    eld gener at
    e annualcash i
    nfl
    owsof$75, 000.The f i
    rm'
    sdiscountr ateis8
    percent.How manyy ear
    smustt heannualcashf l
    owsbegener at
    edf orthe
    NPVi sPositi
    ve projecttogenerat
    eanetpresentvalueof$0?( M)
    49.(I
    gnorei ncomet axesi nthispr oblem.)BenzCompanyi sconsideri
    ngt he a.bet ween5and6y ear
    s c. between7and8y ear
    s
    purchaseofamachi nethatcosts$100, 000andhasausefull
    if
    eof18y ears. b.bet ween6and7y ear
    s d.bet ween8and9y ear
    s Bar
    fi
    eld
    Thecompany '
    srequi r
    eddi scountr at
    eis12%.Ifthemachine'
    snetpr esent
    valueis$5, 850,thent heannualcashi nfl
    owsassociat
    edwit
    ht hemachi ne PresentValueComput at
    ions
    mustbe( r
    oundt othenear estwhol edoll
    ar)
    :(M) Combi nedProj
    ects
    a.$42, 413. 45.Considertwopr oj
    ectsAandBwithpresentv
    aluesPV(A.=300( di
    scount
    ed
    b.$14, 600. at10%)andPV( B.=500(di
    scount
    edat15%) . Thepr esentv
    alueofthe
    c. $13,760. combi nedpr
    ojectis:
    d.i ti
    simpossi bletodet er
    mi nefrom thedatagi
    ven. G&N9e A.800 C.300
    B.500 D.Noneoft heabove B&M
    43.(I
    gnoreincomet axesi nt
    hisprobl
    em.)Givent
    hefol
    lowingdata:
    Presentinvestmentrequi
    red $12,
    000 Dif
    ferent
    ial Depr eciati
    onTaxShiel d
    Netpresentv al
    ue $ 430 40.ForP450, 000,Mabi niCorpor ation purchased a new machi ne with an
    Annualcostsav ings $? esti
    mat edusef ulli
    feoffiv
    ey ear swithnosal vagev al
    ue. Themachi neis
    Di
    scountr ate 12% expectedt opr oducecashflowf rom operati
    onsnetof40%i ncomet axes(as
    Li
    feoft heproject 10year
    s shown bel ow) . Mabi niwi lluse t he sum- of
    -the-year
    s’-digi
    ts met hod to
    Basedont hedat agiven,t
    heannualcostsavi
    ngswouldbe:(M) depreciatet henewmachi ne( asshownbel ow).
    a.$1, 630.
    00. c. $2,
    123.
    89. After-TaxCashFl ow SYDDepr eciat
    ion
    b.$2, 200.
    00. d.$2,553.
    89. G&N9e Firstyear P160, 000 P150,000
    Secondy ear 140,000 120,000
    NPVi sNegat i
    ve Thi r
    dy ear 180,000 90,000
    42.Highpoint,I
    nc.,i
    sconsider
    inginvesti
    nginautomat edequi pmentwithat en- Four thy ear 120,000 60,000
    yearusef ulli
    fe.Managers atHi ghpoi
    nthav e estimated the cash f
    lows Fifthy ear 100,000 30,000
    associatedwiththet
    angibl
    ecostsandbenef i
    tsofaut omat i
    on,buthavebeen Thepr esentv alueof1f or5per iodsat12%i s3.
    60478.Thepr esentvalueof
    unablet oesti
    mat ethecashflowsassociatedwi t
    ht heintangi
    blebenefi
    ts. 1at12% atendofeachper iodar e:EndofPer iod1–0. 8928;Per i
    od2–
    Usingt hecompany '
    s10% discountrate,t
    henetpr esentv al
    ueoft hecash
    CMAEXAMI NATIONQUESTI ONS Page22of22
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    0.
    79719,Peri
    od3–0. 71178;Per
    iod4–0.63552;Peri
    od5–0. 56743. machineasf ol l
    ows:
    HadMabiniusedstrai
    ght-
    li
    nemet hodofdepr
    eciat
    ion,whatisthedif
    fer
    ence Fi
    rstyear P150,000
    i
    nnetpresentval
    ueprovi
    dedbythemachineatadiscountrateof12%? Secondy ear 120,000
    A.Incr
    easeofP9,750 C.DecreaseofP24,376 Thir
    dy ear 90,
    000
    B.DecreaseofP9,750 D.Incr
    easeofP24,376 Pol Bobadi
    ll
    a Fourthy ear 60,
    000
    Fi
    fthy ear 30,
    000
    17.TristanConsul ting,Inc.oper atesconsul t
    ingoffi
    cesinMani la,Ol
    ongapo,and Thepresentv alueof1f or5periods at12per centis3.60478.Thepr esent
    Cebu.Thef irmi spr esentlyconsi deringani nvest
    menti nanew mai nframe val
    uesof1at12per centatendofeachper i
    odar e:
    comput erandcommuni cati
    onsof twar e.Thecomput erwoul dcostP6mi lli
    on Endof:Per iod1–0. 8928,Peri
    od2-0. 79719,Per i
    od3 -0. 71178, Peri
    od4
    andhav eanexpect edl ifeof8y ear s.Fort axpurposes,thecomput ercanbe -0.
    63552, Per i
    od5-0. 56743
    depr eciated usi ng ei t
    herst r
    aight-li
    ne met hod orSum- of-t
    he-
    Years’-
    Di git
    s Thenetadv ant age(inpresentvalue)ofusingt heSum- of-
    the-Years’
    -Digi
    ts
    (SYD)met hodov erfivey ears.Nosal vagev al
    ueisrecognizedincomput i
    ng methodov ert hestrai
    ght-l
    i
    nemet hodatadi scountrateof12per centis
    depr eciati
    onexpenseandnosal vagev al
    ueisexpectedatt heendoft hel i
    fe a.P14, 620 c. P 7,
    340
    oft heequi pment .Thecompany ’
    scostofcapi tali
    s10%andi tst
    axr at eis b.P12, 188 d.P 9,750 Pol Bobadil
    la
    40%.
    Thepr esentv alueofanannui t
    yof1f or5per iodsis3.791andf or8per i
    odsi s UnevenCashFlows
    5.335.Thepr esentv al
    uesof1att heendofeachper i
    odar e: 11.Whati
    sthepr esentvalueoft
    hef
    oll
    owi
    ngcashf
    lowatadiscountr
    ateof15%
    1 0.9091 5 0.6209 APR?
    2 0.8264 6 0.5645 t
    =1 t
    =2
    3 0.7513 7 0.5132 -
    100,000 300,
    000
    4 0.6830 8 0.4665 A.$185,000 C.$139,
    887
    Thepr esentv alueoft henetadv ant ageusingSYDmet hodofdepr eciat i
    on B.$200,000 D.Noneoftheabove B&M
    withaf i
    ve-yearl i
    fe-i nstead ofst raight-
    li
    ne method ofdepr eci
    ating t he
    equipmenti s 9.USSA companyhasanoppor t
    uni
    tyt oinvesti nagol dmine. Thei nit
    ial
    A.P86, 224 C.P115, 168 i
    nvest
    menti s$150mi ll
    ion.Theminei sesti
    mat edt opr oduce80,
    000ounces
    B.P215, 560 D.P287, 893 PolBobadi ll
    a ofgol
    dpery earforthenexttenyears.Theext racti
    oncostofgol dperounce
    i
    s$100andt heexpectedrevenueisatthatlevel.Supposet hecurrentpri
    ce
    43.Sil
    l
    imanCor porati
    on purchased anew machi neforP450,000. Thenew ofgol
    dis$300perounce.Thepr iceofgoldi sexpect edt ogrowat4%per
    machinehasanest imatedusefull
    if
    eoff i
    vey ear
    swithnosalvageval
    ue.The yearf
    ortheforeseeablefutur
    e.Ift
    heappr oximat ediscountrateis10%,then
    machinei sexpect ed to pr
    oducecash f lowsf rom oper
    ati
    ons,netof40 thepr
    esentvalueofgoldis:
    percenti
    ncomet axes,
    asf ol
    lows: A.Lesst han$300perounce C.Gr eaterthan$300perounce
    Fir
    styear P160,
    000 B.$300perounce D.Notenoughi nformat
    ion B&M
    Secondy ear 140,
    000
    Thir
    dy ear 180,
    000 10.USSA companyhasanoppor t
    uni
    tyt oinvesti nagol dmine. Theini
    tial
    Fourt
    hy ear 120,
    000 i
    nvest
    mentis$150mi l
    l
    ion.Theminei sest
    imat edtoproduce80,
    000ounces
    Fif
    thyear 100,
    000 ofgol
    dperyearfort
    henexttenyears.Theextracti
    oncostofgoldperounce
    Sil
    l
    imanwi lluset hesum- of-t
    he-
    years-
    digi
    ts’methodt odepreci
    atethenew i
    s$100andt heexpect
    edrevenueisatthatlevel.Supposethecurr
    entpri
    ce
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page23of23
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ofgoldis$290perounce.Thepr i
    ceofgoldisexpectedtogrowat5%per l
    xi
    i.
    PoleCo.isinv
    esti
    nginamachi newitha3-yearl
    ife.Themachinei sexpect ed
    yearforforeseeabl
    ef ut
    ure. I
    ftheapproxi
    mateddi scountr
    atei
    s8%,the toreduceannualcashoper
    atingcostsby$30,000i neachofthefirst2y ears
    presentv
    alueofgoldis: andby$20,000inyear3.Presentval
    uesofanannui tyof$1at14%ar e:
    A.Lesst han$290perounce C.$290perounce Peri
    od 1 2 3
    B.Gr eat
    erthan$290perounce D.Noneoft heabov e B&M Factor 0.88 1.65 2.32
    Usinga14%costofcapital
    ,whatisthepresentvalueofthesefut
    uresav i
    ngs?
    11.USSA companyhasanoppor tuni
    tyt oi nvesti nagol dmi ne. Thei ni
    tial (E)
    i
    nv estmenti
    s$150mi ll
    ion.Themi nei sestimat edtoproduce80,000ounces a.$59, 600 c. $62,
    900
    ofgoldpery earforthenextteny ears.Theext r
    acti
    oncostofgol dperounce b.$60, 800 d.$69,500
    i
    s$100andt heexpectedrevenuei satt hatlevel.Supposethecur rentpr
    ice
    ofgol di
    s$300perounceandt hepr i
    ceofgol disexpectedtoincreaseata l
    xi
    ii
    . Mur rayisplanningapr ojectthatwillcost$22, 000. Theannualcash
    rateof5%pery earf
    ortheforeseeablef utur
    e.Whati sthecurrentvalueof0.2 inf
    low,netofincomet axes,willbe$5,000ay earf or7y ear
    s.Thepr esent
    mi l
    li
    onouncesofgol dtobepr oducedeachy earforthenextf i
    veyears(the val
    ueof$1at12%i sasfoll
    ows:
    discountrat
    ei s8%pery ear) Per i
    od PresentVal ueof$1at12%
    A.$300mi ll
    ion C.261. 49mi l
    li
    on
    1 .893
    B.275. 70mi ll
    ion D.Noneoft heabov e B&M
    2 .797
    3 .712
    12.USSA companyhasanoppor t
    unityt oi nvesti nagol dmi ne. Thei ni
    tial
    4 .636
    i
    nvestmentis$150mi l
    l
    ion.Themi nei sestimat edtoproduce80,000ounces
    5 .567
    ofgoldpery earfort
    henextt eny ears.Theext racti
    oncostofgol dperounce
    6 .507
    i
    s$100andt heexpect
    edr evenuei satt hatlevel.Supposethecur rentpr
    ice
    7 .452
    ofgoldis$300perounce, thepriceofgol disexpect edtoincr
    easeby10%f or
    thenexttwoy earsandat4%af terwar d.Theydiscountrateis10%, whatisthe Usingar at
    eofr eturnof12%,whati st hepr esentv al
    ueoft hecashf l
    ow
    curr
    entv al
    ueof0. 2mill
    ionouncesofgol dtobepr oducedeachy earforthe generat
    edbythisproject
    ?(E)
    next5years? a.$22,600 c. $34,180
    A.$300mi l
    lion C.$261. 49mi l
    li
    on b.$22,820 d.$35, 000 AI
    CPA1177I -23
    B.281. 07mi ll
    i
    on D.Noneoft heabov e B&M
    CashFlowf orCer t
    ainYear s
    NetAnnual CostSavi
    ngs Questi
    ons89t hru91arebasedont hefoll
    owi
    nginf
    ormat
    ion. G&N9e
    *. BRGAssembl y
    ,Inc.isconsider
    ingt hepur chaseofanaut omaticwirebonder (Ignorei ncomet axesint hisprobl em.)TheBeckerCompanyisi nt
    erestedin
    whichcostP750, 000.Ithasat eny earli
    fewi t
    houtanysal vagev al
    ue.BRG buying a pi ece ofequi pmentt hatitneeds.The fol
    l
    owing data have been
    wouldsav eP200,000inlaborcostsannual l
    yasar esultoftheuseoft henew assembl edconcer ningthisequipment :
    machine.Powercostwoul dhowev erincreaseP25, 000annually
    .Thecostof Costofr equir
    edequi pment $250,000
    capit
    alis16%.Thepr esentval
    uef actorf or10y earsat16%i s4.8332. The Wor kingcapi t
    al r
    equired $100,000
    presentval
    ueofthenetannual costsav i
    ngsis(E) Annual operati
    ngcashi nfl
    ows $80,000
    a.P845, 810 c. P745,810 Cashr epairatendof4y ears $40,000
    b.P575, 000 d.P966, 640 RPCPA1097 Salvagev al
    ueatendof6y ears $90,000
    Thisequipmenti sexpectedt ohav eausefull
    i
    feof6year
    s.Attheendoft hesi
    xth
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page24of24
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    yearthewor ki
    ngcapi
    talwoul
    dber
    eleasedf
    oruseel
    sewher
    e.Thecompany
    's 93.Thenetpr esentv ueofal
    al lcashfl
    owsassociat
    edwi
    tht
    hisi
    nvest
    ment
    discountr
    ateis10%. (r
    oundedtothenearestdol
    l
    ar)i
    s:(M)
    a.$377,950. c. $392,
    950.
    89.Thepr
    esentv
    alueofal
    lfut
    ureoper
    ati
    ngcashinf
    lowsiscl
    osestt
    o:(
    M) b.$382,735. d.$362,950.
    a.$480,
    000. c. $348,
    400.
    b.$452,
    300. d.$278,700. Risk-adj
    ustedDi scountRate
    Quest i
    ons19t hru21ar ebasedont hefoll
    owinginformat i
    on. Git
    man
    90.Thepresentval
    ueoft henetcashflows( allcashi
    nfl
    owsl
    essal
    lcash Af i
    rmi sconsi deringinvestmentinacapi t
    alproj
    ectwhi chisdescri
    bedbel ow.
    out
    fl
    ows)occurr
    ingdur
    ingy
    ear4is:
    (E) Thef ir
    m'scostofcapi talis18per centandt heri
    skf reerateis6percent.The
    a.$40,000. c. $54,640. projecthasar i
    ski ndexof1. 5.Thef i
    rm usesthefollowingequati
    ontodetermine
    b.$27,320. d.$42, 790. ther i
    skadjusteddi scountrate,RADR,foreachpr oject: RADR=Rf+Ri skIndex
    (CostofcapitalRf )
    91.Thepresentval
    ueoft henetcashflows( al
    lcashi
    nfl
    owsl
    essal
    lcash I
    niti
    alI
    nvestment $1,
    000,000
    out
    fl
    ows)occurr
    ingdur
    ingy
    ear6iscl
    osestto:
    a.$270,000. c. $107,
    200. Year CashInf
    low
    b.$195,900. d.$152,300. 1 $500,
    000
    2 500,
    000
    Certai
    nYear&NetPr esentValue 3 500,
    000
    Questions92&93ar ebasedont hefoll
    owingi nf
    ormation. G&N9e
    (Ignorei ncomet axesi nthispr obl
    em. )URCompanyi sconsider
    ingr ebuil
    ding 19.Thenetpresentv
    aluewi
    thoutadj
    ust
    ingt
    hedi
    scountr
    atef
    orr
    iski
    s
    andsel li
    ngusedal t
    ernatorsf orautomobiles.Thecompanyest i
    mat est hatthe A.$336,000. C.$179,
    400.
    netoper ati
    ngcashf l
    ows( saleslesscashoper ati
    ngexpenses)ari
    singf rom the B.$250,000. D.$87,
    000.
    rebuil
    dingandsal eoft heusedal ternat
    orswoul dbeasf ol
    l
    ows( number sin
    parenthesesindicateanout fl
    ow) : 20.Thedi
    scountr at
    ethatshoul
    dbeusedint
    henetpr
    esentv
    aluecal
    cul
    ati
    ont
    o
    Year s1-10. .. $90, 000 compensateforri
    skis
    Year11. .
    ..
    ..
    .. (20,000) A.6per cent. C.18per
    cent.
    Year12. .
    ..
    ..
    .. 100, 000 B.15per cent. D.24per
    cent.
    I
    naddi tiontot heabov enetoper ati
    ngcashf l
    ows,URCompanywoul dpur chase
    productionequi pmentcost ing$200, 000now t ousei ntherebuil
    dingoft he 21.Thenetpr
    esentv
    alueoft
    hepr
    ojectwhenadj
    ustingf
    orr
    iski
    s
    alt
    ernators.Theequi pmentwoul dhav ea12- yearl
    ifeanda$15,000sal v
    agev alue. A. $9,
    500. C.$87,000.
    Thecompany 'sdiscountrateis10%. B.$0. D.$105,000.

    92.Thepresentv al
    ueofthenetoperat
    ingcashf l
    ows( sal
    eslesscashoperat
    ing NetPresentVal
    ueComputat
    ion-Der
    ivat
    ion
    expenses)ari
    singfrom t
    herebui
    l
    dingandsal eofthealter
    nator
    s(roundedto GivenPaybackPeri
    od
    l
    xi
    v
    thenearestdoll
    ar)i
    s:(
    M) .ShannonIndustr
    iesi
    sconsi
    deri
    ngapr oj
    ectwhi
    chhasthef ol
    lowi
    ngcash
    a.$582, 735. c. $577,950. fl
    ows:
    b.$596, 735. d.$591, 950. Year Pr
    ojectCashFl
    ow
    0 ?
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page25of25
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    1 $2,000 B.+$60 D.Noneoft


    heabov
    e. B&M
    2 3,000
    3 3,000 Si
    ngleCashInflow
    4 1,500 15.I
    ft hepresentvalueofacashfl
    ow gener
    atedbyani ni
    ti
    ali
    nvest
    mentof
    Theprojecthasapay
    backof2. 5years. Thefir
    m’scostofcapit
    alis12 $100,
    000is$120,000,
    whati
    stheNPVoftheproj
    ect
    ?(E)
    per
    cent.Whatist
    hepr
    oject
    ’snetpr
    esentval
    ueNPV?(M) A.$120,000 C.$100,000
    a.$577. 68 d.$2, 761.
    32 B.$20,000 D.Noneoft heabov
    e B&M
    b.$765. 91 e. $3,765.
    91
    c. $1,
    049.80 Bri
    gham EvenCashFl ows,NoPresentValueTabl
    e
    43.Ani nvestmentopport
    unit
    ycost i
    ng$75,000isexpect
    edt oyiel
    dnetcash
    GivenProfit
    abil
    i
    tyIndex fl
    owsof$22, 000annual
    lyforfi
    veyears. TheNPVoft heinv
    estmentata
    93.TheMcNal l
    yCo.i sconsider
    inganinvest
    menti napr oj
    ectthatgenerat
    esa cutoffrat
    eof12%woul dbe
    prof
    itabil
    i
    tyindexof1.3.Thepresentval
    ueoft hecashinf
    lowsont heproj
    ect a.$( 4,310) c. $75,
    000
    is$44,000.Whatisthenetpresentval
    ueofthisproj
    ect?(M) b.$4, 310 d.$79,310 D,
    L&H9e
    a.$10, 154 c. $57,
    200
    b.$13, 200 d.$33,846 Bar
    fi
    eld 43.Ani nvestmentopport
    unit
    ycosti
    ng$75,000isexpect
    edt oyiel
    dnetcash
    fl
    owsof$23, 000annual
    lyforfi
    vey
    ears.TheNPVoft heinv
    estmentata
    NetPresentValue–I gnoreI
    ncomeTaxes cutoffrat
    eof14%woul dbe(E)
    GivenPresentValueofCashInfl
    ow a.$( 3,959)
    . c. $75,
    000.
    16.Aniniti
    alinvest
    mentof$400, 000willproduceanendofy earcashf
    low of b.$3, 959. d.$78,959. L&H10e
    $450,000.Whati stheNPVoft hepr
    ojectatadiscountr
    ateof10%?(E)
    A.$9090. 90 C.$0( zer
    o) 47.Ani nvestmentopport
    uni
    tycost
    ing$110,000isexpect
    edtoyi
    eldnetcash
    B.$409, 090.90 D.Noneoft heabove B&M fl
    owsof$28, 000annual
    lyf
    orsixyears. TheNPVoft hei
    nvest
    mentata
    cutoffrat
    eof12%woul dbe(
    E)
    Combi
    nedProj
    ect a.$( 5,108) c. $110,
    000
    4.Ift
    henetpresentval
    ueofpr
    ojectAi
    s+$80,andofpr
    ojectBi
    s+$60,
    thent
    he b.$5, 108 d.$115,108 D,L&H9e
    netpr
    esentvalueoft
    hecombinedpr
    ojecti
    s:(
    E)
    A.+$80 C.+$140 47.Ani nvestmentopport
    unit
    ycosting$150,000isexpect
    edt oyi
    eldnetcash
    B.+$60 D.Noneoftheabove B&M fl
    owsof$36, 000annuall
    yforsi
    xy ear
    s.TheNPVoftheinvest
    mentatacutof
    f
    rat
    eof12%woul dbe(E)
    5.I
    ftheNPVofpr oj
    ectAis+$100,andthatofproj
    ectBis-$50andt
    hatof a.$( 2,004)
    . c. $150,
    000.
    pr
    ojectCi
    s+$20,whati
    stheNPVofthecombinedpr
    oject
    ?(E) b.$2, 004. d.$147,996. L&H10e
    A.$100 C.$120
    B.-$50 D.$70 B&M 51.TheWhi t
    tonCompanyusesadi scountr ateof16%.Thecompanyhasan
    opportuni
    tytobuyamachi nenowf or$18,000thatwi
    lly
    iel
    dcashinf
    lowsof
    7.I
    ftheNPVofprojectAis+$50andt
    hatofproj
    ectBi
    s-$60,t
    hent
    heNPVof $10,000pery earf
    oreachofthenextthreey ear
    s.Themachi
    newoul
    dhav eno
    thecombi
    nedproj
    ecti
    s:(E) sal
    vagev alue.Thenetpresentvalueoft hismachinetothenear
    estwhole
    A.+$50 C.-$10 dol
    laris:(E)
    CMAEXAMINATIONQUESTIONS Page26of26
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$22,
    460. c. $(
    9,980)
    . b.P625,
    000 d.P450,
    000 RPCPA1095
    b.$4,
    460. d.$12,000. G&N9e
    Quest i
    ons8,9and10ar ebasedont hefoll
    owinginf ormat i
    on. RPCPA1077
    28.Valent
    ineCompanyi sconsi
    der
    inginvesti
    ngi
    nanewpr oject
    .Thepr oj
    ectwil
    l ABCManuf act
    uringCompanyi stakingintoaccountt woal t
    ernat
    ivestrategi
    esto
    needani ni
    ti
    alinv est
    mentof$1,200,000andwill
    generate$600,000(af
    ter
    -t
    ax) marketanewpr oduct.Tomakeknownt hepr oductwi llnecessi
    tateanout l
    ayof
    cashflowsf ort hreeyears.Calcul
    atetheNPVf orthepr oj
    ectifthecostof P75,000.Wi thal ow pri
    cethepr oductwillgenerat ecashpr oceedsofP50, 000
    capit
    alis15%.( E) pery earandwi l
    lhav eal i
    feoft woy ears. Wi t
    hahi ghpricethepr oductwil
    l
    A.$16, 994 C.$60,000 generatecashproceedsofP90, 000butwi l
    lhav eal i
    feofonl yoney ear.Thecost
    B.$29, 211 D.$25,846 B&M ofmoneyf orthecompanyi s10%.Thef ol
    lowingi sthet abl
    eofPr esentValueof
    10%
    32.Elephantcompanyi sinv
    esti
    nginagi antcrane.Iti sexpect
    edt
    ocost2. 2 N PresentValueofP1 Pr esentVal ueofP1Recei vedper
    mi l
    l
    ioninini
    tialinv estmentandi
    tisexpectedtogener at
    eanendofyearcash Period
    fl
    ow of1. 0mi l
    lioneachy earf
    orthreey ears. Calcul
    atetheNPV at12% 1 .9091 0.9091
    (approxi
    mat ely
    ).( E) 2 .8264 1.7355
    A.2. 4milli
    on C.0. 80mi l
    li
    on 3 .7513 2.4869
    B.0. 20mi l
    li
    on D.0. 40mi l
    li
    on B&M 4 .6830 3.1699
    5 .6209 3.7908
    EvenCashFl ow, WithPresentVal
    ueTable
    *. AprojectrequiresthepurchaseofanassetforP6,
    500.Annualcashbenefi
    ts *
    . Thenetpresentv
    alueoft
    hel
    ow-
    pri
    ceproductst
    rat
    egyi
    s:
    areP2,000f or5y ear
    s.Thef i
    rm’
    scostofcapit
    ali
    s12%andt hepresentv
    alue a.P11,775 c. P75,
    000
    ofanannui tyofP1f or5peri
    odsat12%is3.605.Thenetpresentval
    ueofthe b.P25,000 d.P175,000
    proj
    ectis:(E)
    a.P520 c. P710 *
    . Thenetpresentv
    alueoft
    hehi
    gh-
    pri
    cest
    rategyis:
    b.P650 d.P805 RPCPA1078 a.P6,819 c. P65,000
    b.P15,342 d.P165, 000
    *
    . Alang-
    alangsaLahatFoundat i
    on,I nc.anonst ock,nonprofi
    tandt ax-exempt
    foundationi nvestedP1mi l
    li
    oni naf i
    ve-yearproj
    ectatt hebeginningoft he *
    . Themarket
    ingstrat
    egyt hatshoul
    dbeaccept
    edi s:
    year.Thef oundat i
    onest
    imatest hattheannualsav ingsfor
    mt heprojectwi l
    l a.Thelow-pri
    cestrategy c. Eit
    her of t he two mar
    ket
    ing
    amountt oP325, 000.TheP1mi l
    li
    onasseti sdepr eciabl
    eov erf
    ive(5)y ears st
    rat
    egi
    es
    onast rai ght-
    li
    nebasis.Thef oundat i
    on’shurdler ateis12%.Tof acili
    tate b.Thehigh-pr
    icestrategy d.Nei ther of the t
    wo mar
    ket
    ing
    comput ations,belowarepresentv aluefactor
    s: st
    rat
    egi
    es
    N=5 12% 14% 16%
    Presentv alueofP1 0.57 0.52 0.48 EvenCashFl ow,Salv
    ageValue,NoPr esentVal
    ueTabl
    e.
    Presentv alueofanannui ty 3. 60 3.40 3.30 45.(I
    gnoreincomet axesinthi
    spr oblem.)Apieceofequi
    pmenthasacostof
    ofP1 $20,000.Theequipmentwil
    lprovidecostsavi
    ngsof$3,
    500eachyearf
    orten
    Thenetpr esentv al
    ueoft
    hepr ojectis(E) years,af
    terwhichti
    meitwil
    lhav easalvageval
    ueof$2,
    500.I
    fthecompany'
    s
    a.P170, 000 c. P182,000 discountrat
    eis12%,theequipment '
    snetpr
    esentv
    aluei
    s:(
    M)

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page27of27
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$580. c. $17,
    500. towit
    hdraw $15,
    000fr
    om thebusinessatt heendofeachy earf
    ort henext
    b.($225)
    . d.$2,275. G&N9e fi
    veyears.Attheendofthef i
    ft
    hy ear,Sam pl anstosel
    lthebusinessfor
    $110,
    000cash.Ata12%di scountrate,whatist henetpr
    esentv
    alueoft he
    6.Anewgr ocerystor
    ecost$30mil
    li
    oninini
    ti
    ali
    nvestment.I
    tisesti
    matedthat i
    nvest
    ment ?(M)
    thestorewi l
    lgenerat
    e2mi l
    li
    ondol
    lar
    saftert
    axcashf l
    owf orf
    iveyear
    s.At a.$54,075. c. $46,445.
    theendof5y earsitcanbesoldfor$40mi l
    l
    ion.Whati stheNPVoft he b.$62,370. d.$70, 000. G&N9e
    proj
    ectatadi scountrat
    eof10%?
    A.$2. 42mi ll
    i
    on C.$.69mill
    i
    on EvenCashFl ow,Wor ki
    ngCapital,NoPr esentValueTabl e
    B.$18mi ll
    ion D.Noneoft heabov
    e B&M 46.ParksCompanyi sconsideringani nvest
    mentpr oposali nwhichawor ki
    ng
    capit
    ali nvestmentof$10, 000 woul d ber equired.Thei nv
    estmentwoul d
    7.Anewgr ocerystor
    ecost$30mil
    li
    oninini
    ti
    ali
    nvest
    ment.Iti
    sesti
    matedthat provi
    decashi nf
    lowsof$2, 000pery earf orsixy ears.Thewor kingcapital
    thestorewi l
    lgenerat
    e2mi l
    li
    ondol
    lar
    saftert
    axcashflowforf
    iveyear
    s.At wouldber eleasedforuseel sewherewhent heprojectiscompl eted.Ift
    he
    theendof5y earsitcanbesoldfor$35mill
    ion.WhatistheNPVoft he company '
    sdiscountrat
    eis10%, theinvest
    ment '
    snetpr esentval
    ueis: (
    M)
    proj
    ectatadi scountrat
    eof10%? a.$1, 290. c. $2,000.
    A.$2. 42mi ll
    i
    on C.$-0.
    69mill
    ion b.( $1,290). d.$4, 350. G&N9e
    B.$18mi ll
    ion D.Noneoftheabove B&M
    48.Bost onCompanyi scont emplati
    ngt
    hepur chaseofanewmachi
    neonwhi ch
    52.Thef ol
    lowingdataper t
    aintoaninvest
    ment : thef oll
    owi ngi nformationhasbeengathered:
    Costoft heinvestment $18,
    955 Costoft hemachi ne $38,
    900
    Lifeoftheproject 5year
    s Annual cashi nfl
    owsexpect ed $10,
    000
    Annual costsavings $5,
    000 Salvagev alue $5,
    000
    Estimatedsalvagev al
    ue $1,
    000 Lifeoft hemachi ne 6years
    Discountrate 10% Thecompany '
    sdi scountrateis16%,andt hemachinewi
    l
    lbedepr eci
    ated
    Thenetpr esentvalueoftheproposedinvest
    menti
    s:(
    M) usingt hest raight-l
    inemet hod.Giv
    ent hesedat a,t
    hemachi
    nehasanet
    a.$3, 355. c. $-
    0-. presentv al
    ueof :(M)
    b.( $3,430). d.$621. G&N9e a.- $26,100. c. $0.
    b.- $23,900. d.+$26, 100. G&N9e
    53.Thefollowingdataper t
    aintoaninvest
    mentpr oposal
    :
    Costoft heinvestment $20,
    000 EvenCashFl ow, SalvageValue,Wor ki
    ngCapi tal
    ,NoPr esentValueTabl e
    Annual costsavings $5,
    000 11.A projectrequi r
    esani niti
    alinvestmenti nequi pmentof$90, 000andt hen
    Estimatedsalvagev al
    ue $1,
    000 requir
    esani nv estmentinwor ki
    ngcapi talof$10, 000atthebegi nning( t=0).
    Li
    feoft heproject 8year
    s Thepr ojectisexpect edt opr oducesal esr evenuesof$120, 000f orthree
    Discountrate 16% years.Manuf acturi
    ngcost sareest i
    mat edt obe60%oft herev enues.The
    Thenetpr esentvalueoftheproposedinvestmentis:
    (M) assetsar edepr eciat
    edusi ngst r
    aight-
    linedepr eciat
    ion. Attheendoft he
    a.$1, 720. c. $2,
    154. proj
    ect ,
    thefirm canselltheequipmentf or$10, 000.Thecor poratet axrateis
    b.$6, 064. d.$2,025. G&N9e 30%andt hecostofcapi t
    al i
    s15%.Cal cul at
    et heNPVoft heproject.( M)
    A.8443 C.–2735
    55.Sam Wel
    leri
    sthi
    nki
    ngofinv
    est
    ing$70,
    000t
    ost
    artabookst
    ore.Sam pl
    ans B.3840 D.Noneoft heabove B&M
    CMAEXAMI NATIONQUESTI
    ONS Page28of28
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    a.$2,915. c. $5,
    283.
    44.Thef ol
    lowingdat aper tai
    nt oani nvest
    menti nequipment: b.$(11,708)
    . d.$6,317.
    I
    nvestmentint hepr oject $10,
    000
    Netannualcashi nflows 2,
    400 88.Thenetpresentv
    alueofpr
    ojectYi
    scl
    osestto: (M)
    Worki
    ngcapi talrequired 5,
    000 a.$15,110. c. $11,708.
    Sal
    vagev al
    ueoft heequi pment 1,
    000 b.$30,250. d.$( 11,708)
    .
    Li
    feofthepr oject 8years
    Att hecompletionoft hepr oject
    ,thewor ki
    ngcapi talwi
    llberel
    easedforuse Questions96t hru98ar ebasedont hefollowinginformati
    on. G&N9e
    elsewhere.Comput et henetpr esentv al
    ueoft heproj
    ect,usi
    ngadi scount Lamber tManuf acturinghas$60, 000t oinvestineitherProj
    ectAorPr oj
    ectB.The
    rateof10%: (
    M) fol
    lowingdataar eav ailableont hesepr ojects:
    a.$606. c. ($1,729)
    . Proj
    ectA Proj
    ectB
    b.$8, 271. d.$1, 729. G&N9e Costofequi pmentneedednow $120,000 $70,
    000
    Wor ki
    ngcapi talinv estmentneeded - $50,
    000
    47.Thef oll
    owingdat aper t
    aintoani nvestmentproposal
    : now
    I
    nv estmenti nthepr oj
    ect(equipment ) $14,
    000 Annual netoper atingcashi nflows $50,000 $45,
    000
    Netannual cashinflowspromi sed 2,
    800 Salvagev al
    ueofequi pmenti n6 $15,000 -
    Wor kingcapitalrequir
    ed 5,
    000 years
    Salvagev al
    ueoft heequipment 1,
    000 Bothpr oj
    ectshav eausef ulli
    feof6y ear s.Attheendof6y ears,thewor king
    Lifeoft heproject 10y ears capit
    alinvestmentwi llber eleasedf oruseel sewhere.Lambert
    'sdiscountrateis
    Thewor ki
    ngcapi talwouldber eleasedforuseelsewherewhenthepr oj
    ecti
    s 14%.
    compl eted.Whati sthenetpr esentv al
    ueoftheproject
    ,usi
    ngadiscountrat
    e
    of8%?( M) 96.Thenetpresentv
    alueofPr
    ojectAi
    scl
    osestt
    o:(
    M)
    a.$2, 566. c. $251. a.$82,241. c. $74,
    450.
    b.( $251) . d.$5,251. G&N9e b.$67,610. d.$81,290.
    Questi
    ons87&88ar ebasedont hefol
    lowinginfor
    mat i
    on. G&N9e 97.Thenetpresentv
    alueofPr
    ojectBi
    scl
    osestt
    o:(
    M)
    TheSawy erCompanyhas$80, 000t oinv estandi sconsi deri
    ngt wodi f
    ferent a.$77,805. c. $55,
    005.
    proj
    ect
    s,XandY.Thef ollowi
    ngdat aareav ail
    abl
    eont heprojects: b.$127,805. d.$105,005.
    ProjectX Proj
    ectY
    Costofequipmentneedednow. .. $80,000 -- 98.Whichofthef
    oll
    owingstatementsis(are)correct?
    Worki
    ngcapi talr
    equi r
    ement. .
    .. -- $80,
    000 I
    .Pr oj
    ectAi
    sacceptableaccor
    dingtot henetpr esentval
    uemethod.
    Annualcashoper ati
    ngi nf
    lows.. $23,000 $18,
    000 II
    .Pr oj
    ectAhasaninter
    nalrat
    eofr et
    ur ngreaterthan14%.(M)
    Sal
    vagev al
    uei n5y ears..
    ...
    .. $6,000 -- a.Onl yI
    . c. BothIandI I.
    Bothproj
    ectswillhav eausef ulli
    feof5y ears;attheendof5y ears,t
    hewor king b.Onl yI
    I. d.Nei therInorII
    .
    capi
    talwil
    lbereleasedf oruseelsewhere.Sawy er'
    sdi scountrateis12%.
    EvenCashFl
    ow,Sal
    vageVal
    uef
    orOl
    d&NewMachi
    ne,Wor
    kingCapi
    tal
    ,NoPV
    87.Thenetpr
    esentv
    alueofpr
    ojectXi
    s:(
    M) Tabl
    e

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page29of29
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Questions94&95ar ebasedont hefoll


    owi nginfor
    mat i
    on. G&N9e t=0 t=1 t
    =2 t
    =3
    West l
    andCol legehasat el
    ephonesy st
    em t hatisinpoorcondi tion.Thesystem -250,000 100,
    000 150,
    000 200,
    000
    eit
    hercanbeov erhauledorr eplacedwithanewsy st
    em.Thef ol
    lowingdatahav e A.$101,221 C.$142,
    208
    beengat heredconcer ni
    ngt hesetwoal t
    er nati
    ves: B.$200,000 D.Noneoftheabov
    e B&M
    Present ProposedNew
    System System 13.Giventhef
    oll
    owi
    ngcashfl
    ow forpr
    ojectA:C0=- 2000,C1=+500,C2=
    Pur chasecostnew $250,000 $300,000 +1500andC3=+5000,
    cal
    cul
    atetheNPVofthepr
    ojectusi
    nga15%discount
    Accumul at eddepr eciati
    on $240,000 -
    rat
    e.(E)
    Ov erhaul cost sneedednow $230,000 -
    A.$5000 C.$3201
    Annual cashoper atingcosts $180,000 $170,000
    B.$2857 D.$2352 B&M
    Salv agev aluenow $160,000 -
    Salv agev al ueatt heendof8 $152,000 $165,000 l
    xv
    .TheSeat t
    leCorporati
    onhasbeenpr esentedwi t
    haninvestmentopportunit
    y
    year s
    whichwillyi
    eldend-of
    -yearcashflowsof$30, 000pery eari
    nYears1t hrough
    Wor kingcapi t
    alrequi red - $200,000
    4,$35,000pery earinYear s5t hrough9,and$40, 000i nYear10. Thi s
    West l
    andCol legeusesa10%di scountrateandt hetotalcostappr oachtocapit
    al i
    nvestmentwi l
    lcostthefir
    m $150,000t oday,
    andt hef
    irm’scostofcapitali
    s
    budget i
    nganal ysi
    s.Bot halter
    nativesareexpect edtohav eausef ulli
    feofeight 10percent.WhatistheNPVf ort
    hisinv estment?(M)
    years.(Uset hr eedecimal pl
    acesf orPVf actor) a.$135, 984 d.$51, 138
    b.$18, 023 e. $92, 146
    94.Thenetpr
    esentval
    ueoft
    heal
    ter
    nat
    iveofov erhauli
    ngthepr
    esentsy
    stem i
    s: c. $219,045 Bri
    gham
    (D)
    a.$(1,
    279,
    316). c. $801, 284. l
    xvi
    .Youareconsider
    ingthepur chaseofaninvestmentthatwouldpayyou$5,000
    b.$(1,
    119,
    316). d.$( 1,194,036)
    . peryearforYears1-5,$3,000peryearforYear s6-
    8,and$2,000peryearfor
    Years9and10.I fyour equir
    ea14per centrateofreturn,
    andthecashfl
    ows
    95.Thenetpresentv
    alueoft
    heal
    ter
    nat
    iveofpurchasingthenewsy
    stem i
    s:(
    D) occurattheendofeachy ear
    ,thenhowmuchshoul dy oubewil
    li
    ngtopayfor
    a.$(1,
    076,495). c. $(
    1,169,
    895). thi
    sinvestment
    ?(M)
    b.$(1,236,
    495). d.$(969,895). a.$15, 819.
    27 d.$38, 000.
    00
    b.$21, 937.
    26 e. $52, 815.
    71
    UnevenCashFlows, NoPr esentVal
    ueTabl e. c. $32,415.
    85 Bri
    gham
    12.Whatisthenetpr esentvalueofthefollowi
    ngcashfl
    owatadi scountr
    ateof
    15%? 8.USSA companyhasanoppor tuni
    tyt oinvestinagol dmi ne. Theinit
    ial
    T=0 t
    =1 t=2 i
    nv est
    mentis$150mi l
    l
    ion.Themi nei sesti
    matedt oproduce80,000ounces
    -
    120,000 -100,000 300,000 ofgoldperyearf
    orthenextteny ear
    s.Theext racti
    oncostofgol dperounce
    A.$19,887 C.$26,300 i
    s$100andt heexpectedrevenueisatt hatl
    evel.Thecur r
    entpri
    ceofgoldis
    B.$80,000 D.Noneoft heabov
    e B&M $300perounceandi tisexpect
    edt oincreaseby4%pery earforthenext10
    years.Whati stheNPVoft heprojectatadi scountrateof10%? ( I
    gnore
    10.Whati
    sthenetpr
    esentv
    alueoft
    hef
    oll
    owi
    ngcashf
    lowsatadi
    scountr
    ate taxes.
    )(D)
    on12% A.$- 34mil
    li
    on. C.$-27.5mill
    ion
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page30of30
    MANAGEMENTADVI
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    CES CAPI
    TALBUDGETI
    NG

    B.$40.
    8mi
    l
    li
    on D.Noneoft
    heabov
    e B&M
    l
    xx
    .Hawkey eCleaner shasbeenconsi deringt hepur chaseofani ndustrialdr y
    -
    l
    xvi
    i
    .GrantCompanyisconsi deri
    nganinvest
    mentof$30,000.Dat arel
    atedtothe cl
    eani ngmachi ne.Theexi sti
    ngmachi nei soper abl eforthreemor eyear sand
    i
    nvestmentareasfoll
    ows: wil
    lhav eazer odi sposalpr i
    ce.Ift hemachi nei sdisposedofnow,i tmaybe
    Year CashInflows soldf or$60,000.Thenewmachi newi llcost$200, 000andanaddi ti
    onalcash
    1 $10,000 i
    nvest menti nwor ki
    ngcapi talof$60, 000wi llber equi r
    ed.Thenew machi ne
    2 12,
    000 wil
    lr educet heav erageamountoft imer equir edt owashcl othingandwi ll
    3 15,
    000 decreasel aborcost s.Thei nvestmenti sexpect edt onet$50, 000inaddi ti
    onal
    4 20,
    000 cashi nfl
    owsdur ingthey earofacqui siti
    onand$150, 000eachaddi t
    ionaly ear
    5 10,
    000 ofuse.Thenewmachi nehasat hree- yearlife,andzer odisposalv al
    ue.These
    Costofcapi
    tali
    s18per cent. cashf lowswi llgener al
    lyoccurt hroughoutt hey earandar erecognizedatt he
    Whatisthenetpresentvalueoft
    heinvest
    ment,assumingnot axesarepai
    d? endofeachy ear.Incomet axesar enotconsi deredi nt hisproblem.The
    a.$7,000 c. $40,
    911 workingcapi tal i
    nvestmentwi llnotber ecov eredatt heendoft heasset '
    sl i
    fe.
    b.$10,911 d.$37,000 H&M Whati sthenetpr esentv al
    ueoft hei nv estment ,assumi ngther equiredr ate
    ofreturnis10%?Woul dthecompanywantt opur chaset henewmachi ne?( M)
    l
    xvi
    i
    i
    .
    Acapi talinvest
    mentprojectrequi
    resani nvest mentof$50,000andhasan a.$82, 000;yes c. $( 50,000) ;yes
    expectedl i
    feof4y ears.Annualcashf lowsatt heendofeachy earar
    e b.$50, 000;no d.$( 82,000) ;no Hor ngren
    expectedt obeasf ol
    l
    ows: l
    xxi
    Year Amount .Hawkey eCl eanershasbeenconsi deringt hepur chaseofani ndustrialdr y
    -
    1 $20,000 cleaningmachi ne.Theexi sti
    ngmachi nei soper abl ef orthreemor eyear sand
    2 24,
    000 willhav eazer odisposalpr i
    ce.Ifthemachi nei sdisposedofnow,i tmaybe
    3 38,
    000 soldf or$60, 000.Thenewmachi newi l
    lcost$200, 000andanaddi ti
    onalcash
    4 28,
    000 i
    nv estmenti nwor kingcapitalof$60, 000wi llber equi red.Thenew machi ne
    willreducet heav erageamountoft imer equir edt owashcl othingandwi ll
    Ignor
    ing i ncometaxes,thenetpr esentvalueoft heprojectusi
    ng a6%
    decreasel aborcosts.Thei nvestmenti sexpect edt onet$50, 000inaddi ti
    onal
    discountr at
    eis
    cashi nflowsdur ingt heyearofacqui siti
    onand$150, 000eachaddi t
    ionaly ear
    a.$44, 316 c. $34,148
    ofuse.Thenewmachi nehasat hr
    ee-y earli
    fe.Thesecashf lowswi l
    lgener all
    y
    b.$12, 396 d.$( 14,148) H&M
    occurt hroughoutt hey earandar erecogni zedatt heendofeachy ear.Income
    l
    xi
    x taxesar enotconsi deredint hi
    sprobl em.Thewor kingcapi talinvestmentwi ll
    .TheZer onCor porat
    ionwant st opurchaseanew machi nefori
    tsfactory
    notber ecov er
    edatt heendoft heasset 'sli
    fe.
    operati
    onsatacostof$950, 000.Thei nvestmenti sexpectedtogenerate
    Whati st henetpr esentv al
    ueoft hei nv estment ,assumi ngther equiredr ate
    $350,000inannualcashf lowsforaperiodoff oury ears.Therequi
    redr
    ateof
    ofreturni s24%?Woul dthecompanywantt opur chaset henewmachi ne?( M)
    retur
    ni s14%.Theol dmachi necanbesol df or$50, 000.Themachinei s
    a.$( 32,800) ;
    yes c. $16, 400; y es
    expectedtohavezerov alueattheendoft hefour-yearper i
    od.Whatist
    henet
    b.$( 16,400) ;
    no d.$32, 800; no Hor ngren
    presentvalueofthei nv
    est ment?Wouldt hecompanywantt opur
    chaset he
    newmachi ne?Incomet axesarenotconsi der
    ed.(M) l
    xxi
    i
    .Wetand Wild WaterCompanydr il
    l
    ssmal lcommerci
    alwaterwell
    s.The
    a.$119, 550;y
    es c. $1,019,550; yes
    company i
    si nthe process ofanaly
    zing t
    he pur
    chase ofa new dr
    il
    l.
    b.$69, 550;no d.$326, 750; no Horngren
    Inf
    ormat
    ionontheproposali
    sprov
    idedbelow.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page31of31
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nit
    ialinv est
    ment : per
    tainingtothepurchaseandoper at
    ionoft hismachinery:
    Asset $160,
    000 Year EstimatedAnnual CashInfl
    ow Pr esentValueofP1at
    Wor ki
    ngcapi t
    al $32,000 20%
    Operat i
    ons( pery earforfouryear
    s): 1 P 60,000 0.91
    Cashr eceipts $160,
    000 2 30,
    000 0.76
    Cashexpendi tures $88,000 3 20,
    000 0.63
    Di
    sinv estment : 4 20,
    000 0.53
    Sal vagev alueofdr i
    ll(
    exist
    ing) $16,000 5 20,
    000 0.44
    Di
    scountr at
    e 20% P150,000 3.27
    Whatist henetpr esentvalueoftheinvest
    ment ?Assumet
    her
    ei snorecover
    y Whatist henetpresentval
    ueoft hi
    sinvestment ?(E)
    ofworkingcapi tal.(M) a.P80, 000. c. P109,400
    a.$(62,140) c. $42,
    362 b.P9, 400. d.P54, 128 RPCPA1001
    b.$10,336 d.$186,336 Horngr
    en
    13.KanlaonUni versit
    yhasat elephonesy stem t hatisi npoorcondi ti
    on. The
    UnevenCashFl ow, WithPresentVal ueTabl e system ei thercan beov erhauled orr eplaced wi th a new sy stem. The
    *. Youhav ebeenconsul t
    edt oadv i
    seCPACor p.ont heproj
    ect
    edacquisi
    ti
    onof foll
    owi ngdat ahav ebeengat heredconcer ningt hesetwoal t
    ernati
    v es:
    anotherpr oductionlinecost ingP1mi ll
    i
    on.Thel inehasanexpecteduseful Present ProposedNew
    l
    ifeof5y earswi thoutanysal vagev alue.Thecompany ’
    shurdl
    eratei
    s20% Sy stem Sy stem
    andthef ollowinginformationwer emadeav ai
    labletoyou. Pur chasecost-new P250, 000 P300, 000
    Year Est imat edAnnual CashI nflow PresentValueofP1at Accumul ateddepr eciation 240,000 -
    0-
    20% Ov erhaul costsneedednow 230,000 -
    0-
    1 P 600, 000 0.
    91 Annual cashoper atingcost s 180,000 170,000
    2 300, 000 0.
    76 Sal vagev aluenow 160,000 -
    0-
    3 200, 000 0.
    63 Sal vagev alueatt heendof8 152,000 165,000
    4 200, 000 0.
    53 y ears
    5 200, 000 0.
    44 Wor kingcapi talr
    equi red -
    0- 200,000
    P1,500, 000 3.
    27 KanlaonUni versi
    tyusesa10%di scountrat eandt het ot
    alcostappr oacht o
    Assumi ngt hatthecashf lowi sgener atedevenlyduri
    ngtheyear,y
    ouradvi
    ce capitalbudget inganal ysi
    s.Bot hal t
    ernativesar eexpectedt ohav eausef ul
    i
    s( E) l
    ifeofei ghty ears.Thepr esentv al
    ueat10%ofannui tyof1f or8per iodsis
    a.Toi nv estduet onetpresentv al
    ueofP94, 000. 5.33493andof1att heendof8per i
    odsis0. 46651.
    b.Toi nv estduet onetpresentv al
    ueofP541, 280. Indeci dingbasedont hel esscostt otheuni versi
    ty,thenetpresentv alueof
    c. Toinv estduet onetpresentv al
    ueofP635, 000. theal ternat i
    v eofpur chasi ng thenew sy stem i s( Not
    e: Useonl yt hr
    ee
    d.Toi nv estduet onetadv antageofP500, 000. RPCPA1096 decimal placesf orPVf act ors).
    A.P1, 076, 662 C.P1, 236,662
    *
    . ABCCor porati
    onisplanni
    ngt obuypr
    oduct i
    onmachi ner
    ycostingP100,
    000. B.P1, 392, 662 D.P1, 084,662 Pol Bobadill
    a
    Thismachinery’
    sexpectedusefull
    i
    feis5y ears,wit
    hnor esi
    dualval
    ue.ABC
    requi
    resar at
    eofr eturn of20%,and hascal culat
    ed thefoll
    owi
    ng data
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page32of32
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    NPVGi venAf terTaxCashFl ow


    EvenCashFl ows, NoPresentValueTable NPVGi venBef oreTaxCashFl ow
    l
    xxii
    i. Jerkins Company i s consi
    dering an i
    nvestmentprojectwhich wi l
    l EvenCashFl ow,NoPr esentVal ueTable
    generateal evelaft
    er-t
    axcashflow of$500,
    000ay earinthenext5y ears. l
    xxv. JacksonCor porationusesnetpr esentv aluet echniquesi
    nev al
    uatingits
    Returns on compar abler i
    sk inv
    estment opport
    uni
    ti
    es ar e 14%. The capitali
    nv estmentpr ojects.Thecompanyi sconsi deringanew equipment
    i
    nvest mentr equi
    resacashout layof$1.5mill
    ion.Whatist henetpr
    esent acquisit
    iont hatwillcost$100, 000,f ull
    yinstalled,andhav eazer osal v
    age
    val
    ueoft hi
    spr oj
    ect
    ?(E) valueatt heendofi tsf i
    ve-yearproductivelif
    e.Jacksonwi l
    ldepreci
    atet he
    A.( $43,150) C.$216,500 equipmenton a st r
    aight-li
    ne basisf orbot hf i
    nancialand taxpurposes.
    B.$108, 250 D.$444,350 Jacksonest i
    mates$70, 000i nannualr ecurri
    ngoper ati
    ngcashincomeand
    Gleim $20,000i nannualr ecurri
    ngoper atingcashexpenses. Jackson’ scostof
    capitali
    s12% andi tsef fecti
    veincomet axr ateis40%. Whati sthenet
    l
    xxi
    v
    .
    R.D.Inc.purchasedamachi nefor$240,
    000.Themachi nehasausef ull
    if
    e presentv al
    ueoft hi
    si nvestmentonanaf ter-
    taxbasi s?(E)
    ofsixyears,nosalvagev alue,andstrai
    ght-
    li
    nedepreciati
    onistobeused. a.$28, 840 c. $36,990
    Themachi nei sexpectedtogener atecashf lowsfrom operat
    ions,netof b.$8, 150 d.$80, 250 CMASampQ4
    incometax,of$70,000i neachoft hesixyears.R.D.Inc'
    scostofcapitali
    s -
    4
    12%.Thenetpr esentvalueis:
    A.$180,000 D.$121, 680 l
    xxv
    i. Drill
    ersInc.isev aluati
    ngapr oj
    ectt oproduceahi gh-t
    echdeep- seaoi l
    B.$35,490 E.$123, 330 explorati
    ondev i
    ce.Thei nv
    estmentr equiredis$80mi ll
    ionforapl antwi t
    ha
    C.$47,770 C&U capacityof15,000uni tsay earfor5y ears.Thedev icewi l
    lbesoldf orapr i
    ce
    of$12, 000peruni t
    .Sal esareexpect edt obe12, 000uni tspery ear.The
    EvenCashFl ows, Wit
    hWACCComput ation,NoPresentVal ueTable vari
    ablecosti s$7, 000 and fixed costs,excluding depreciati
    on,ar e$25
    10.TheMM Cor p.isplanningconst ruct i
    onofanew war ehouseforitssingle mill
    ionpery ear
    .AssumeDr i
    l
    lersempl oy sstrai
    ght -
    li
    nedepr eci
    ationonal l
    manuf acturi
    ng plant
    . The i nit
    ialcostoft he inv estmenti s $1 mi l
    l
    ion. depreciableassets,andassumet hattheyaret axedatar ateof36%.I fthe
    Effi
    cienciesfrom thenew f acil
    it
    yar eexpectedt or educeaf ter-
    taxcostsby requir
    edr ateofretur
    ni s12%, whatistheappr oximat eNPVoft hepr oject?(M)
    $100,000f oreachoft henext15y ears.Thecor porat i
    onhasat otalval
    ueof A.$17, 225,000 C.$26, 780,
    000
    $60mi l
    l
    ionandhasout standingdebtof$40mi ll
    ion.Whati stheNPVoft he B.$21, 511,000 D.$56, 117,
    000 Glei
    m
    proj
    ectift hefi
    rm hasanaf ter-
    taxcostofdebtof3%andacostequi tyof9%?
    l
    xxv
    ii
    (M) . Spar r
    ow Cor por at
    ion is consideri
    ng an i nv
    est
    menti n equipmentfor
    A.$37, 970 C.$69,901 $30,
    000.Spar rowusest hest rai
    ght-l
    inemet hodofdepreci
    ati
    onwi thnomid-
    B.$60, 401 D.Noneoft heabov e B&M yearconv enti
    on.I nadditi
    on,t hei
    rtaxr at
    ei s40percent,andt heli
    feofthe
    equi
    pmenti sfivey earswithnosal v
    agev alue.Theexpectedincomebefore
    34.Af ir
    mi sproposingtoundertakeascal
    eexpansi on.I twouldcost$40mill
    ion depreciati
    onandt axesi spr oject
    edt obe$15, 000pery ear.Thecostof
    andpr oduceanexpect edcashf l
    owof$8mi l
    li
    onay earinperpet
    uit
    ybefore capi
    tal i
    s18per cent .
    tax.Thet axr ateis35%.Thef i
    rmisfinanced40%bydebt .Theexpect ed Whati sthenetpr esentvalueoft heinvest
    ment ?
    returnont hefirm'
    sequityis20%,andt hei nterestrateoni t
    sdebtis12%. a.$5, 648 c. $35,648
    Whati stheNPVoft hepr
    ojectusi
    ngthewei ghtedav eragecostofcapi
    tal
    ? b.$( 1,857) d.$28, 143 H&M
    A.- $21.48mi l
    li
    on C.- $9.05mi l
    lion
    B.$12. 91mi l
    lion D.- $5.61mi l
    lion B&M Ev
    enCashFl
    ow,
    Wit
    hPr
    esentVal
    ueTabl
    e
    CMAEXAMI NATIONQUESTI ONS Page33of33
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    *
    . OnJanuar y1,StudleyCompanypur chasedanewmachi nef or$100,000t obe P170,000annual
    ly.Thecompanyhasanef fecti
    vet axrateof40%.I tuses
    depr
    eciatedov er5y ears.I twillhav enosal vagev al
    ueatt heendof5y ear s. 16% ashur dl
    er atein eval
    uat
    ing capit
    alprojects. Shouldt hecompany
    Forbookandt axpur poses,depr eciationwi l
    lbe$20, 000pery ear
    . The proceedwit
    htheP320,000capital
    invest
    ment ?(D)
    machinei sexpectedt opr oduceannualcashf low f
    rom oper at
    ions,bef ore Year Pr esentValue PresentVal
    ueofanOr dinary
    i
    ncomet axes,of$40, 000.Assumet hatSt udleyusesadi scountr ateof12% ofP1 AnnuityofP1
    andthatitsincomet axr at
    ewi llbe40%f orallyears.Thepr esentv al
    ueof$1 1 0.
    862 0.862
    at12%f or5per iodsis0. 57,andt hepr esentv alueofanor dinaryannuityof 2 0.
    743 1.605
    $1at12%f orfi
    veper i
    odsi s3.61.TheNPVoft hemachineshoul dbe( E) 3 0.
    641 2.246
    a.$15,520posi tiv
    e. c. $60,000positi
    v e. a.Yes, duetoNPVofP6, 556. c. Yes,duet oNPVofP61, 820.
    b.$15,520negat i
    ve. d.$25, 000negativ e.AI CPA0582I -37 RPCPA0596
    b.Yes, duetoNPVofP11, 684. d.No, duet onegativeNPVofP1,136
    *
    . TheGener alManagerofTel aMill
    sInc.isconsi der
    ingthepurchaseofsome
    newmachi nes.Themachi neswouldcostP4, 000,
    000wi t
    haneconomi cli
    fe EvenCashFl ow, SL&SYDDepr eciationMet hod, WithPresentValueTabl e
    of8y ear swi thoutanysal vagev al
    ue. Oncesetup,t heywoul dgenerate Number s14and15ar ebasedont hef ollowi nginformation: RPCPA0589
    P12,500, 000addi ti
    onalr evenuesbuty earlyexpensesforadditi
    onallaborand MENUDO CORP.i sev al
    uat ingani nv est mentofP480, 000i nequipmentwi t
    ha
    mater i
    alswoul dalsoi ncreasebyP11, 500,000.Assumet hecompanyuses usefulli
    feof3y earsandnosal vagev alue.Anest imatei ndi
    cat
    est hatthecash
    str
    aight -
    linedepr eciati
    onf ortaxesandt hattheappropri
    atetaxr at
    ei s35%. fl
    owbef orei
    ncomet axfrom t hei nvest mentwi llamountt oP240,000ay earand
    Ther equi redaf ter-
    taxrateofr et
    urnis14%. i
    sexpect edtoy i
    eldadi scount edr ateofr etur
    nof12%.Nor mally,str
    aight-
    li
    ne
    Thef oll
    owi ngdat aar eforani nt
    erestrateof15%and8per iods. methodofdepr eciati
    onisused,butt hePr esidentwasi nformedt hatinvestment
    Pr esentv alueofP1 0.3506 wouldbemor ef avorabl
    ei ft hesum- of -the-yearsdigitmet hodofdepr eciati
    onis
    Fut ur ev al
    ueofP1 2.8526 used. You wer e usi
    ng t he t wo met hods ofdepr eciati
    on f
    orpur poses of
    Pr esentv alueofannui tyofP1 4.6389 compar ison.I ncomet axrat eis35%.
    Fut ur ev al
    ueofannui tyofP1 13.2328 Thepr esentv alueofP1.00at12%f or
    Thecompanyshoul d( M) 1y ear 0.893
    a.Pur chaset hemachi nesduet oposi t
    iveNPVofP638, 900. 2y ears 0.797
    b.Notpur chaset hemachi nesduet onegat i
    veNPVofP984, 715. 3y ears 0.712
    c. Notpur chaset hemachi nesduet onegat i
    veNPVofP172, 907.50.RPCPA Thepr esentv alueofanannui tyfor3y ear sat12%i s2.402.
    0595
    d.Bei ndi f
    ferentast ot heoptiondoesnotbr i
    ngaboutanyadv antagenor *
    . Thenetpresentv
    alueoft
    hei
    nvest
    mentusi ngthest
    rai
    ght
    -l
    inemet
    hodof
    disadv antage. depr
    eci
    ati
    onis
    a.P5,068 c. P38,032
    EvenCashFl ow,Unev enDepr eci
    ation,SalvageVal ue,WithPresentValueTabl
    e b.P36,480 d.P29, 224
    *. JJ Corp.i s consideri
    ng the purchase ofa new machi ne thatwil
    lcost
    P320,000.Ithasanest imatedusef ull
    ifeof3y ears.Assumet hat30%ofthe *
    . Thenetpresentv
    alueoft
    hei
    nvest
    mentusi
    ngthesum-
    of-
    year
    sdi
    gitmet
    hod
    depreci
    ablebasewi l
    lbedepr eciat
    edi nthefirsty ear,
    40%i nthesecondyear, i
    s
    and30%i nthet hi
    rdy ear.Ithasar esalevalueofP20, 000att heendofi t
    s a.P34,292 c. P36,
    480
    economicl i
    fe.Sav ingsar eexpectedf rom theuseofmachi neesti
    matedat b.P38,032 d.P43,116

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page34of34
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Revenues 15 20 25
    UnevenCashFl ow Costs -10 -8 -5
    13.Gol
    dsmi t
    hl absr ecov ergoldfrom printedcircui
    tboards.I thasdevel
    opeda I
    fthecashf l
    owsareperpetui
    ti
    esandt hecostofcapi
    tali
    s10%.Whatdoesa
    newequipmentf orthepur pose.Thef ollowingdataisgiven. sensi
    ti
    vit
    yanal
    ysi
    sofNPV( notaxes)show? B&M
    1)Equipmentcost s$250,000 NPV Pessimist
    ic MostLikel
    y Optimi
    sti
    c
    2)Itwillcost100, 000pery eartorun A. -50 20 +100
    3)Ithasaneconomi cli
    feof5y earsandi sdepr
    eciatedusingstr
    aight-
    li
    ne B. -
    100 -50 +80
    method C. -50 +50 +70
    4)Itwillrecover1000ouncesofgol dpery ear D. Noneoft he
    5)Thecur rentpri
    ceofgol dis$300perounceandi texpectedtoi
    ncreaseat above
    ar
    ate4%pery earf ortheforeseeablefuture
    6)Thet axr ateis30%
    8.A proj
    ecthasani niti
    ali nvestmentof$150. Youhav ecomeupwi ththe
    7)Thecostofcapi talis8%
    fol
    lowingestimatesofr evenuesandcost s.
    WhatisNPVoft heequi pment?
    A.$580,400 C.$470, 400 Pessimi sti
    c MostLikel
    y Opt
    imist
    ic
    B.$520,510 D.Noneoft heabov e B&M Totalrevenues +30 +50 65
    Totalcosts -25 -
    20 -15
    Wit
    hPessi mi stic,ExpectedandOpt i
    misticOutcome Ift
    hecashf lowsareper petui
    tiesandt hecostofcapi
    tali
    s10%.Whatdoesa
    l
    xxvii
    i.Thef ollowingf orecast
    shav ebeenpr eparedf oranew i nvestmentby sensit
    ivi
    tyanalysi
    sofNPV( not axes)show? B&M
    Oxfor dIndust r
    iesof$20mi l
    li
    onwi t
    han8- yearlife: NPV Pessi misti
    c MostLikel
    y Opti
    misti
    c
    Pessimisti
    c Expect ed Optimisti
    c A. -
    100 +150 +350
    Mar ketsi ze 60,000 90,000 140,000 B. -50 +300 +500
    Mar ketshar e,% 25 30 35 C. +50 -100 +400
    Unitpr ice $750 $800 $875 D. Noneoft he
    Unit v ariable $500 $400 $350 abov e
    cost
    Fi
    xed cost, $7 $4 $3. 5 9.Youhav ecomeupwi ththefol l
    owingestimatesofpr oj
    ectcashfl
    ows:
    milli
    ons Pessimi st
    ic MostLi kel
    y Opt
    imist
    ic
    Assumet hatOxf or
    dempl oysstraight-
    li
    nedepr eci
    ati
    on,andt hattheyare Inv
    estment s -100 -80 -60
    taxedat35%.Assumi nganoppor tunitycostofcapi t
    alof14%,whati sthe TotalRevenues +30 +40 +50
    NPVoft hispr oject,
    basedonexpect edout comes? TotalCosts -20 -15 -10
    A.$2, 626, 415 C.$6, 722,109 Thecashf lowsareperpet
    uitiesandt hecostofcapi tali
    s10%.Whatdoesa
    B.$4, 563, 505 D.$8, 055,722 Gl
    eim sensit
    ivi
    tyanal
    ysi
    sofNPV( wit
    houttaxes)show? B&M
    NPV Pessimi stic MostLi kely Optimist
    ic
    7.A proj
    ecthasanini
    ti
    alinv
    estmentof100. Youhav
    ecomeupwi t
    hthe A. 0 +170 +340
    f
    oll
    owingesti
    mat
    esoftheproj
    ect
    swit
    hcashfl
    ows. B. 0 +500 +800
    NPV Pessi
    misti
    c MostLi
    kel
    y Opt
    imi
    sti
    c C. -90 -55 -20
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page35of35
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    D. Noneofthe pr
    esentval
    ueusi
    nga10%di
    scountf
    actor
    ?(E)
    abov
    e a.$2,610 c. $9,
    570
    b.$4,350 d.$11,310 Gl
    eim,
    RPCPA1001
    Sensi
    tiv
    ityAnalysi
    s
    Changei nRevenues&Costs DiscountRat e
    l
    xxxi
    12.Apr ojecthasthefoll
    owingcashf l
    ows:C0=- 100,000;C1=50,000;C2= .StoneCo.i sconsider
    ingtheacqui sit
    ionofequi pment .Tobuyt heequi pment,
    150,000;C3=100,000.Ifthediscountr
    atechangesfrom 12%to15%,what thecosti s$15,192. To l easet heequi pment ,St onemustsi gn a non-
    wouldt heNPVoft heproj
    ecti
    ft herev
    enueswer ehigherby10% andthe cancelableleaseandmakef iv
    epay mentsof$4, 000each.Thef irstpay ment
    costswer e65%oftherev
    enues?(D) willbepai dont hefir
    stdayoft hel ease.Att het i
    meoft hel astpay ment,
    A.$5566 C.$5611 Stonewi llrecei
    vetit
    letotheequi pment .Thepr esentval
    ueofanor di
    nary
    B.$964 D.Noneoft heabove B&M annuityof$1i sasfoll
    ows:
    PresentVal ue
    ChangeinFi
    xedCost s No.ofPer i
    ods 10% 12% 16%
    l
    xxix. WhathappenstotheNPVofa1- yearprojecti
    ffi
    xedcostsar
    eincr
    eased 1 0.909 0.893 0.862
    fr
    om $500to$600,thefir
    mi sprof
    it
    able,hasa35%t axrateandemploy
    sa 2 1.736 1.690 1.605
    12%costofcapit
    al?(
    E) 3 2.487 2.402 2.246
    A.NPVdecr easesby$100.00. C.NPVdecr easesby$65.
    00. 4 3.170 3.037 2.798
    B.NPVdecr easesby$89.
    29. D.NPVdecr easesby$58.
    04. Glei
    m 5 3.791 3.605 3.274
    Thei nt
    erestrateimpl
    ici
    tinthisleasei sapproximat el
    y
    ChangeinDiscountRate a.10% c. Between10%and12%
    10.Apr oj
    ecthast hefoll
    owingcashf l
    ows:C0=- 100,
    000;C1=50, 000;C2= b.12% d.16% AI
    CPA1178I -39
    150,
    000;C3=100, 000.Ifthedi
    scountrat
    echangesfrom 12%to15%,whati
    s
    thechangeintheNPVoft heproj
    ect(appr
    oxi
    mat el
    y)?(M) PROFITABI LI
    TYI NDEX
    A.12,750decr ease C.122,650increase Gi
    venNetPr esentVal
    ue
    B.12,750increase D.135,400decr ease B&M *. Fri
    endlyCor p.’
    sProj
    ectSkyhasaneti nvest
    mentofP1.2mil
    li
    on.Thenet
    presentv al
    ueofallfutur
    enetcashinfl
    owsisP2.
    4mill
    ion.Thecompany’
    s
    13.Aprojecthasthefol
    lowi
    ngcashf l
    ows:C0=- 100,
    000;C1=50,000;C2= taxrateis40%.Thepr ofi
    tabi
    l
    ityi
    ndexi
    s(E)
    150,
    000;C3=100,000.Ifthediscountratechangesfrom 12%to15%,what a.0. 50 c. 0.
    83
    woul
    dbet heNPVoftheprojecti
    fthediscountratewerehi
    gherby10%? b.1. 20 d.2.00 RPCPA0597
    A.$5648 C.–$2735
    B.$3840 D.Noneoft heabove B&M GivenInter
    nalRateofReturnwit
    hPr esentVal ueTable
    41.SuluCompanyi sconsider
    ingtoacqui reamachi neinor dert
    or educeits
    Leases dir
    ectlaborcosts.Thismachineshal llastf or4yearswi t
    hnosal v
    agev al
    ue.
    PresentValue Currentl
    y,t
    hecashexpensesamount edt oP120,000pery ear
    . Thei ni
    ti
    al
    l
    xxx. Fort henext2y ears,al
    easeisest
    imatedtohaveanoper at
    ingnetcash analysi
    sindicat
    edthatthetime-adjust
    edr ateofreturnis15%.At12%( cost
    infl
    owof$7, 500perannum,beforeadj
    ust
    ingfor$5,
    000perannum t axbasis ofcapitalt
    of i
    nancethepurchaseoft hemachi ne),thecompanyexpect snet
    leaseamor ti
    zat
    ion,anda40% t axrat
    e. Thepresentvalueofanor di
    nary presentval
    ueofP5,470.80.
    annuit
    yof$1pery earat10%for2year
    sis1.74.Whatisthelease’
    safter
    -tax
    CMAEXAMI NATIONQUESTI ONS Page36of36
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Thepresentvalueof1f orfourperi
    odat12% is3.03735andat15% is Giv
    enPr esentValueofAf t
    erTaxCashFl ows
    2.
    85499.Ignor
    ingincometaxconsi
    der
    ati
    ons,
    thepr
    ofi
    tabi
    li
    tyi
    ndexi
    s(D) Questi
    ons33and34ar ebasedont hefol
    lowi
    ngi
    nfor
    mati
    on. RPCPA0593
    A.1.064 C.1.047 Pert
    inentdatafort wo( 2)alternat
    iveswhichar
    ebeingconsi
    deredbyt heBl
    ue
    B.1.183 D.1.250 Pol
    Bobadi
    l
    la NunCo.ar e:
    1 2
    EvenCashFl ows, I
    gnoreIncomeTaxes, NoPr esentVal
    ueTabl e Presentval
    uesofannual cashflows P546,
    480 P306, 495
    l
    xxxii
    .MesaCompanyi sconsider
    ingani nvestmentt o openanew banana Presentval
    uesoft heneti nvest
    ment 500,
    000 312,500
    processingdivi
    sion.Theproj
    ectinquestionwoul dentailani
    nit
    iali
    nvest
    ment Excess(defi
    ciency
    )pr esentv al
    ue P 46,
    480 (P 6,005)
    of$45, 000,andasar esul
    toft hepr oj
    ectcashi nf
    lowsof$20, 000canbe
    expectedi neachoft henext3y ears.Thehur dl
    er ateis10%.Whati sthe *
    . Thepr of
    itabi
    l
    ityi
    ndexisameasureofthedesirabi
    li
    tyofinvest
    ment swhi
    ch
    profi
    tabil
    it
    yindexfortheproj
    ect?(E) arenotoft hesamesize.Gi
    vent heabov
    edat a,theprof
    itabi
    li
    tyindi
    cesf
    or
    A.1. 0784 C.1. 1379 al
    ternati
    ves1and2ar e
    B.1. 1053 D.1. 1771 a. b. c. d.
    Gleim
    Alt
    ernati
    ve1 1.09 1.
    21 1.09 0.98
    Alt
    ernati
    ve2 0.69 1.
    15 0.98 1.11
    45.Aninvest
    mentopport
    unitycost
    ing$150,
    000isexpect
    edtoy i
    eldnetcash
    fl
    owsof$50,000 annual
    lyforf i
    veyear
    s. The pr
    ofi
    tabi
    l
    ityi
    ndexoft he
    i
    nvest
    mentatacutof
    frateof14%wouldbe( E) *
    .I n evaluati
    ng t healter
    nati
    vesf ort heaboveBlueNun Co. ,thef oll
    owing
    a.3.0 c. 0.
    33 statementsar et r
    ueexcept:
    b.1.14 d.14% D,L&H9e a.Al ternati
    ve1i sbetterbecauset hereisanexcesspr esentvalueoft he
    cashf low.
    45.Aninvest
    mentopport
    unitycost
    ing$300,000isexpect
    edtoy i
    eldnetcash b.Thepr ofit
    abi l
    ityi
    ndexofAlternati
    ve1meansthatitwil
    learnlesst hanthe
    fl
    owsof$100,000 annuall
    yforfiv
    ey ears.The pr
    ofi
    tabi
    l
    ityi
    ndexoft he lowestaccept abl
    erateofreturn.
    i
    nvest
    mentatacutof
    frateof14%wouldbe c. Alternati
    ve2i snotacceptablebecauseitspr
    ofi
    tabi
    li
    tyindexislesst han1.
    a.3.0. c. 0.33. d.Thedef i
    ciencypresentval
    uef orAl
    ter
    nati
    ve2meansi tdoesnotmeett he
    b.1.14. d.14%. L&H10e mi nimum r ateofret
    urnrequirement.

    46.Aproj
    ecthasaNPVof$30,
    000whenthecutoffrat
    eis10%.Theannualcash I
    NTERNALRATEOFRETURN
    I
    RRFormul a
    fl
    owsare$41,010onani
    nvest
    mentof$100,000.Thepr of
    it
    abi
    l
    ityi
    ndexfor
    *
    . Twopr oj
    ectshaveani ni
    ti
    aloutl
    ayof$497andeachhasani ncomest r
    eam
    thi
    sproj
    ecti
    s
    last
    ing3y ears.Proj
    ectAr et
    urns$200pery earf
    or3y ears.ProjectBret
    urns
    a.1.367 c. 2.
    438
    $200f orthefir
    st2year sand$248f ort
    het hi
    rdyear.
    b.3.3333 d.1.300 D,
    L&H9e
    n 8% 10% 12% 14%
    1 .9259 .9091 .8929 .8772
    68.Aproj
    ecthasani
    nit
    ialcostof$100,
    000andgenerat
    esapresentv
    alueofnet
    2 .8573 .8264 .7972 .7695
    cashi
    nfl
    owsof$120,000.Whati
    stheproj
    ect'
    spr
    ofit
    abi
    l
    ityi
    ndex?(
    E)
    3 .7938 .7513 .7118 .6750
    a..20 c. .
    80
    Theappr opri
    ateint
    ernal r
    ateofret
    urnv al
    uati
    onforProjectBis
    b.1.20 d.5.00 Bar
    fi
    eld
    a.$200( .
    8772)+$200( .
    7695)+$248(.6750)=$496.74
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page37of37
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.$200(.8929)+$200(
    .7972)+$248(
    .7118)=$514.
    41 coul
    dinv
    estint
    hepr
    ojectandt
    hepr
    ojectsti
    llbeaccept
    abl
    e(r
    ounded)
    ?
    c. $200(
    .9091)+$200(
    .8264)+$248(
    .7513)=$533.
    42 a.$488,740 c. $580,
    291
    d.$200(.9259)+$200(
    .8573)+$248(
    .7938)=$553.
    50 CI
    A1185I
    V-31 b.$562,614 d.$596,160 H&M

    RequiredInvestment 33.(I
    gnoreincomet axesinthispr oblem.)Kipl
    ingCompanyhasi nvest
    edina
    GivenPresentValueofCashI nfl
    ow,IgnoreIncomeTaxes proj
    ectthathasanei ght
    -yearli
    fe.Itisexpectedthattheannualcashi nf
    low
    38.(I
    gnoreincomet axesi nthisproblem.)Apl annedfact
    or yexpansi
    onproj
    ect fr
    om thepr oj
    ectwil
    lbe$20,000.Assumi ngthattheproj
    ecthasai nter
    nalrate
    hasanest i
    matediniti
    alcostof$800,000.Usi ngadiscountrateof20%,the ofret
    urnof12%, howmuchwast heini
    ti
    alinvest
    mentintheproject?(M)
    presentvalueoffuturecostsavi
    ngsf r
    om theexpansioni s$843,
    000.Toyi
    eld a.$160, 000 c. $80,800
    exactl
    ya20% i nternalrat
    eofr etur
    n,theact ualinvestmentcostcannot b.$99,360 d.$64, 640 AICPAadapt ed
    exceedthe$800,000est i
    mat ebymor ethan:(m)
    a.$160, 000. c. $43,000. 34.(Ignoreincomet axesi nthi
    sprobl
    em.)Whi t
    eCompany'sr equi
    redr at
    eof
    b.$20, 000. d.$1, 075. AI
    CPAadapted returnoncapitalbudgeti
    ngproj
    ectsis12%.Thecompanyisconsi deri
    ngan
    i
    nv estmentopportuni
    tywhichwoul
    dyiel
    dacashf l
    owof$10,000infiveyears.
    EvenCashFlow, IgnoreIncomeTaxesNoPr esentVal
    ueTabl e Whati sthemostt hatthecompanyshoul
    dbewi l
    l
    ingt
    oinvestinthisproject
    ?
    91.Annrecentlyinvestedinaprojectt
    hatpromisedaninternalrat
    eofretur
    nof (M)
    15percent.Ifthepr oj
    ecthasanexpectedannualcashinflowof$12,000for a.$36, 050. c. $17,
    637.
    si
    xyears,withnosal vageval
    ue,howmuchdi dAnnpayf ortheproj
    ect
    ? b.$2, 774. d.$5,670. G&N9e
    a.$35,000 c. $72,
    000
    b.$45,414 d.$31,708 Barfi
    eld EvenCashFl ow,SalvageValue,Ignor
    eI ncomeTaxes,
    NoPr esentValueTable
    65.Ti
    gerInc.boughtapi eceofmachi nerywitht
    hefol
    lowingdata:
    l
    xxx
    ii
    i
    . Af i
    rmi sconsideri
    ngapr ojectwit
    hannualcashfl
    owsof$100,000.The Usefulli
    fe 6y ears
    pr
    ojectwouldhav ea7- yearl
    if
    e,andthecompanyusesadi
    scountr
    ateof10%. Yearlynetcashinflow $45,000
    I
    gnoringincomet axes,whati sthemaximum amountthecompanycoul d Salvagev al
    ue -0-
    i
    nvestintheprojectandt heproj
    ectsti
    l
    lbeaccept
    abl
    e? Int
    ernalrateofreturn 18%
    a.$359, 100 c. $486,
    800 Costofcapi t
    al 14%
    b.$700, 000 d.$100,000 H&M Theini
    ti
    al costofthemachi nerywas
    l
    xxx
    iv a.$157, 392.
    . Af i
    rmi sconsider
    ingapr ojectwi
    thannualcashfl
    owsof$40,000.The b.$174, 992.
    pr
    ojectwouldhavea10- yearl
    i
    fe, andt
    hecompanyusesadiscountr
    ateof8%. c. $165,812.
    I
    gnoringincomet axes,whati st hemaximum amountthecompanycould d.impossi bletodeterminefrom theinf
    ormati
    ongiven. Barf
    ield
    i
    nvestintheproj
    ectandtheprojectsti
    llbeaccept
    abl
    e(r
    ounded)
    ?
    a.$400, 000 c. $203,
    210 41.(I
    gnoreincomet axesinthi
    spr obl
    em.)TheBakerCompanypurchaseda
    b.$268, 400 d.$363,604 H&M pi
    eceofequipmentwiththef
    oll
    owingexpect
    edr
    esul
    ts:
    l
    xxx
    v Usef
    ul l
    i
    fe 7years
    . Af ir
    mi sconsider
    ingapr oj
    ectwit
    hannualcashfl
    owsof$120,
    000.The Year
    lynetcashinf
    low $50,000
    projectwouldhavean8-yearli
    fe,
    andthecompanyusesadi
    scountr
    ateof12 Sal
    vagev al
    ue -
    0-
    percent.Ignor
    ingi
    ncomet axes,whati
    sthemaximum amountthecompany
    CMAEXAMI NATIONQUESTI ONS Page38of38
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nternalrateofret
    urn 20% A.$16,
    775 C.$25,
    000
    Discountrate 16% B.$19,
    090 D.$30,
    000 Gl
    eim
    Theinit
    ialcostoftheequipmentwas:(M)
    a.$300, 100. Ev
    enAf ter
    -t
    axCashFl ow,withPr esentValueTable
    b.$180, 250 . CauseCompanyi splanningt oinvestinamachi newi t
    hausef ull
    ifeoffive
    c. $190,600. yearsandnosal v
    agev alue.Themachi nei
    sexpect edtoproducecashf l
    ow
    d.Cannotbedet erminedfr
    om thei
    nformat
    iongi
    ven. G&N9e from operat
    ions,netofi ncomet axes,ofP20,000ineachoft hef i
    veyears.
    Cause’sexpectedr ateofr eturnis10%.I nformati
    ononpr esentvalueand
    UnevenEv enCashFlow, I
    gnoreIncomeTaxes, NoPr esentVal
    ueTable. futureamountfactorsisasf oll
    ows:
    56.(I
    gnoreincomet axesinthisprobl
    em. )Arthuroperatesapart
    -t
    imeautorepai
    r Period
    serv
    ice.Heest i
    mat esthatanew di agnost i
    ccomput ersyst
    em wil
    lresul
    tin 1 2 3 4 5
    i
    ncreasedcashi nfl
    owsof$2, 100i nYear1,$3, 200i nYear2,and$4,000in PV of P1 at .
    900 .826 .751 .683 .
    621
    Year3.IfArthur
    'sdiscountrateis10%,t hent hemosthewoul dbewi l
    l
    ingto 10%
    payforthenewcomput ersyst
    em woul dbe: (M) PVA ofP1 at .
    909 1.736 2.487 3.170 1.
    611
    a.$6, 652. c. $7,747. 10%
    b.$6, 984. d.$7, 556. G&N9e FV of P1 at 1. 000 1.210 1.330 1.464 1.
    611
    10%
    35.(I
    gnor
    eincometaxesi
    nthisprobl
    em.)Inordertor
    ecei
    ve$12,
    000att
    heend FVA ofP1 at 1. 000 2.100 3.310 4.641 6.
    105
    ofthr
    eey ear
    sand$10,000att heendoff i
    veyear
    s,how muchmustbe 10%
    i
    nvest
    ednowi fy
    oucanearn14%r at
    eofretur
    n?(M) Howmuchwi l
    lthemachi necost ?
    a.$12,978. c. $13,
    290. A.P32, 220 C.P75, 820
    b.$8,100. d.$32,054. G&N9e B.P62, 100 D.P122, 100 PolBobadil
    la

    EvenAf ter
    -taxAnnualCashFl
    ow,NoPr esentValueTable UnevenAfter-taxCashFlow, Sal
    vageValue,withPresentValueTabl e.
    l
    xxx
    vi
    . Cont eInc.inv
    estedinamachi newi thausef ull
    if
    eofsi xyearsandno l
    xxxvii
    i
    .Ker
    nCo.i splanningtoinvestina2-yearprojectthatisexpectedtoy ield
    sal
    vagev al
    ue.Themachi neisexpectedtopr oduceannualcashfl
    owsf r
    om cashfl
    owsf rom operati
    ons,netofincomet axes,of$50,000i nthefi
    rstyear
    operat
    ions,netofincometax,of$2,000. I ftheesti
    matedinter
    nalrateof and$80, 000i nthesecondy ear.Ker nrequir
    esani nternalrateofreturnof
    ret
    urnis10%, t
    heamountoftheorigi
    nalinvestmentwas:(M) 15%.Thepr esentvalueof$1f oroneper i
    odat15% i s0.870andf ort wo
    A.$9,000 D.$5, 640 peri
    odsat15%i s0.756.Thef utureval
    ueof$1f oroneper iodat15%i s1.150
    B.$11, 280 E.$8, 710 andfort woper i
    odsat15%i s1.323.Themaxi mum t hatKernshouldi nvest
    C.$12, 000 C&U i
    mmedi at el
    yis(E)
    a.$81, 670 c. $130,000
    EvenAf t
    er-t
    axAnnualCashFlow, Salv
    ageValueNoPr esentValueTable b.$103, 980 d.$163, 340 AICPA1189I I-
    36
    l
    xxxvii
    .TheHopki nsCompanyhasest i
    matedthatapr oposedpr oj
    ect'
    s10-year
    annualnetcashbenef i
    t,receiv
    ed eachy earend,wi l
    lbe$2, 500 wit
    han l
    xxxi
    x
    . OrabCo.hasthechancetoi nvestina2-yearproj
    ectexpectedt
    opr oduce
    additi
    onalter
    minalbenefi
    tof$5, 000attheendoft he10thy ear
    .Assumi ng cashf
    lowsfr
    om oper
    ations,
    netofi ncomet axes,
    of$100,000inthefi
    rstyear
    thatthesecashinfl
    owssatisfyexactl
    yHopkins'
    requiredrateofretur
    nof8%, and$200,
    000inthesecondy ear.Or abrequir
    esaninternalr
    ateofreturnof
    calcul
    atetheini
    ti
    alcashoutlay.(
    E)
    CMAEXAMI NATI
    ONQUESTI ONS Page39of39
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    20%.Thepr esentv
    alueof$1foroneperi
    odat20%is0.833;fort
    woperiods xc.PaybackCompanyi sconsidering t
    hepur chaseofacopi ermachi nefor
    at20%is0.694.Forthi
    sproj
    ect,
    Orabshouldbewi
    ll
    ingt
    oi nv
    estimmediatel
    y P42,825.Thecopi ermachinewi l
    lbeexpect edtobeeconomi cal
    lyproducti
    ve
    amaximum of :(
    E) for4y ears. Thesalvagev alueatt heendof4y ear
    si snegligi
    ble. The
    A.$222,100 C.$283,300 machinei sexpect
    edt oprovi
    de15%i nternalrateofret
    urn.Thecompanyi s
    B.$208,200 D.$249,900 AICPAadapted subj
    ectt o40%incomet axrate.Thepr esentv al
    ueofanor di
    naryannuityof1
    for4per i
    odsis2.85498.Inor dertoreali
    zet heIRRof15%,howmuchi sthe
    Requir
    edLi f
    e esti
    mat edbefor
    e-t
    axcashi nf
    lowt obepr ovidedbythemachine?(M)
    EvenCashFl ow, I
    gnoreI ncomeTaxes, NoPresentVal
    ueTable A.P17, 860 C.P25, 000
    37.(I
    gnorei ncomet axesi nthisprobl
    em.)Thefoll
    owinginf
    ormat
    ionisavai
    labl
    e B.P15, 000 D.P35, 700
    onanewpi eceofequi pment:
    xci
    Costoft heequi pment $21,
    720 .ScottCor porat
    ion’
    snewpr ojectcal
    lsf
    oraninv
    estmentof$10,000.I
    thasan
    Annual cashinflows $5,
    000 esti
    mat edl i
    feof10y ear
    s.TheI RRhasbeencalcul
    atedtobe15per cent.If
    Inter
    nal r
    ateofr eturn 16% cashflowsar eevenl
    ydistr
    ibutedandthetaxrat
    eis40per cent
    ,whatist he
    Requi redrateofr eturn 10% annualbef ore-
    taxcashfl
    oweachy ear
    ?(Assumedepr eci
    ati
    onisanegligi
    ble
    Thel i
    feoft heequi pmenti sapproxi
    mately
    :(M) amount .)(M)
    a.6y ears. a.$1, 993 d.$4,983
    b.4. 3y ears. b.$3, 321 e. $5,
    019
    c. 8y ears. c. $1,500 Brigham
    d.i tisi
    mpossi bletodet ermi
    nef r
    om thedatagi
    ven. G&N9e
    Requir
    edAnnual After -
    taxCashFlow
    RequiredIncreasei nCashFl ows EvenCashFl ow,SalvageVal ue
    *. Thef ollowingdat aper tai
    nt oSunl ightCor p.,whosemanagementi splanning xci
    i. Par aCo.i sr eviewi
    ngt hef ol
    lowingdatarelat
    ingtoanener gysav i
    ng
    topurchaseanaut omat edt anni ngequi pment . i
    nvestmentproposal :
    1.Economi cl i
    feofequi pment–8y ears. Cost $50,
    000
    2.Di sposal v alueaf t
    er8y ear s–ni l. Residualvalueatt heendof5y ear
    s 10,
    000
    3.Est i
    mat ednetannual cashi nfl
    owsf oreachoft he8years–P81, 000. Presentvalueofanannui t
    yof1at12%f or5years 3.
    60
    4.Ti me- adjustedi nternal rateofr eturn–14% Presentvalueof1duei n5y earsat12% 0.
    57
    5.Costofcapi talofSunl ightCor p–16% Whatwoul dbet heannualsav ingsneededt omaket hei
    nvest
    mentr eal
    i
    zea
    6.Thet ableofpr esentv aluesofP1r eceivedannual
    lyfor8y earshas 12%yield?(
    M)
    thesef actor s:at14%=4. 639,at16%=4. 344 a.$8, 189 c. $12,
    306
    7.Depr eciati
    oni sapproxi mat elyP46,970annual l
    y. b.$11, 111 d.$13,889
    Findther equiredi ncreasei nannualcashi nflowsinordertohavethet ime-
    adjustedr ateofr etur napproxi mat elyequal t hecostofcapi
    tal
    .(M) Requi
    redCashFl owf oraCer t
    ainYear
    a.P5, 501 c. P4, 344 EvenCashFl ow,I
    gnor eIncomeTaxes,NoPresentVal
    ueTabl
    e
    b.P6, 501 d.P5, 871 RPCPA0594 39.(
    Ignor
    ei ncomet axesi nt
    hisprobl
    em.)Hi
    ll
    topCompanyinvest
    ed$100,000in
    atwo-yearproject.Thecashf l
    ow was$40,000fort
    hefir
    styear.Assuming
    Requi
    redAnnualBef
    oreTaxCashFl
    ow t
    hatthei nt
    ernalrateofreturnwasexactl
    y12%,whatwast hecashflow f
    or
    EvenCashFlow
    CMAEXAMI NATIONQUESTIONS Page40of40
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    thesecondyearoft
    hepr
    oject
    ?(M) Ift
    heplantl
    astsfor4yearsandthecostofcapit
    alis20%,
    whati
    sthebr
    eak-
    a.$51, 247. c. $64,
    284. evenl
    evelofannualr
    ates?(Assumenotaxes.
    )(M)
    b.$60, 000. d.$80,652. AI
    CPAadapt
    ed A.342,500unit
    s C.125,000unit
    s
    B.217,500unit
    s D.Noneoft heabove B&M
    Requi redI nvestment&Annual CashFl ow
    Quest ions85&86ar ebasedont hefoll
    owinginformat
    ion. G&N9e 17.TajMahalTourcompanyproposest oinv
    est$3mi l
    li
    oninanewt ourpackage.
    (Ignorei ncomet axesi nt hispr oblem.) TheFi nneyCompanyi sreviewi
    ngthe Fi
    xedcostsar e$1mil
    li
    onperyear.Thet ourpackagecosts$500andcanbe
    possi bil
    ityofr emodelingoneofi tsshowr oomsandbuy i
    ngsomenewequi pment soldat$1500perpackagetotourists.Thistourpackageisexpectedt obe
    toi mpr ovesal esoper ations.Ther emodel i
    ngwoul dcost$120,000nowandt he attr
    acti
    veforthenextfi
    veyears.I fthecostofcapitali
    s20%,whati sthe
    usef ull i
    fe oft he pr oj
    ecti s 10 y ears.Additi
    onalwor ki
    ng capit
    alneeded break-
    even number of touri
    sts per y ear? ( I
    gnore taxes, give an
    i
    mmedi atelyfort hispr ojectwoul dbe$30, 000;thewor ki
    ngcapitalwouldbe approxi
    mation.
    )
    releasedf oruseel sewher eatt heendoft he10-yearperi
    od.Theequipmentand A.2000 C.15000
    ot hermat er
    ial
    susedi nt heprojectwoul dhav easalvagev al
    ueof$10,000in10 B.1000 D.Noneoft heabove B&M
    year s.Finney '
    sdiscountr ateis16%.
    18.HammerCompanypr oposestoinvest$6mi ll
    ioninanew t ypeofhammer-
    85.Thei
    mmedi at
    ecashout
    fl
    owr
    equi
    redf
    ort
    hispr
    ojectwoul
    dbe:
    (E) maki
    ngequipment.Thefi
    xedcostsar e$0.
    5mi ll
    i
    onpery ear
    .Theequipment
    a.$(120,
    000). c. $(
    90,
    000). i
    sexpectedtol
    astfor5years.Themanuf acturi
    ngcostsperhammeri s$1.
    b.$(150,
    000). d.$(130,
    000). Cal
    cul
    atethebr
    eak-ev
    envolumepery ear.(
    Ignoretaxes.
    )
    A.400,000 C.250,000
    86.Whatwouldtheannualnetcashinf
    lowsfrom t
    hispr
    ojecthav
    etobei
    nor
    der B.500,000 D.Noneoft heabov e B&M
    toj
    ust
    if
    yinvest
    ingi
    nremodel i
    ng?(M)
    a.$14,495 c. $16,
    147 Requir
    edUnitSales&Selli
    ngPrice
    b.$35,842 d.$29,158 Questi
    ons55and56ar ebasedont hefoll
    owingi nf
    or mati
    on. PolBobadi
    ll
    a
    MoormanPr oductsCompanyi sconsideri
    nganewpr oductt hatwi l
    lsel
    lforP100
    RequiredBreak-evenSales and havea v ar
    iabl
    ecostofP60. Expect ed volumei s20, 000 unit
    s. New
    PesoSal es equi
    pmentcost i
    ngP1,500,000andhav ingaf i
    ve-yearusef ull i
    feandnosal vage
    14.Calculat
    orCompanypr oposestoinvest$6mi l
    lioninanewcal culat
    ormaking val
    uei sneeded,andwi l
    lbedepr eciatedusi ngthest raight -l
    inemet hod. The
    plant. Fixedcostsare$1mi l
    li
    onay ear. Acal culatorcosts$4mi ll
    ionto machinehascashoper ati
    ngcostsofP20, 000pery ear
    .Thef ir
    mi sinthe40%
    manuf actureandcanbesol dfor$19.I fthepl antlastsfor3y earsandthe taxbracketandhascostofcapi t
    alof12%.Thepr esentv alueof1,endoff i
    ve
    costofcapi t
    alis10%,whati stheappr oximatebr eak-evenlevelofannual peri
    odsis0.56743;pr
    esentval
    ueofannui tyof1f or5per iodsi s3.60478.
    sales?( Assumenot axes.)(M)
    A.$227, 550 C.$67, 000 55.How manyunit
    spery earmustt
    hef
    ir
    m sel
    lfort
    hei
    nvest
    mentt
    oear
    n12%
    B.$160, 900 D.Noneoft heabov e B&M i
    nter
    nalrat
    eofret
    urn?
    A.12,838 C.8,
    225
    UnitSales B.10,403 D.7,
    625
    15.Financi
    alCal culat
    orCompany pr
    oposes t
    oi nv
    est$9 milli
    on i
    n a new
    calcul
    atormaki ngplant
    . Fi
    xedcostsare$2mi ll
    i
    onay ear. Af i
    nanci
    al 56.Supposethe20,
    000esti
    matedv ol
    umeissound,butthepri
    ceisindoubt
    ,
    calcul
    atorcosts$8perunitt
    omanufact
    ureandcanbesol
    df or$24peruni
    t. Whatisthesell
    i
    ngpri
    ce( r
    oundedtonear
    estpeso)neededtoearna12%
    CMAEXAMI NATI
    ONQUESTI ONS Page41of41
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    i
    nter
    nal
    rat
    eofr
    etur
    n? b.12and14%. d.16and18%. D,
    L&H9e
    A.P81 C.P70
    B.P85 D.P90 45 Aninvest
    mentopportuni
    tycosti
    ng$180,000isexpectedtoyi
    eldnetcash
    flowsof$53,
    000annuall
    yforf
    iveyear
    s.TheIRRoftheinvest
    mentisbet
    ween
    IRRGivenPay backPeri
    od a.10and12% c. 14and16%.
    xci
    ii
    . SmootAut omotivehasimplement
    edanewpr oj
    ectt
    hathasaninit
    ial
    cost, b.12and14%. d.16and18%. L&H10e
    andthengener atesinfl
    owsof$10,000ay earforthenextseven(7)years.
    Thepr oj
    ecthasapay backper
    iodof4.0y
    ear s.Whatisthepr
    oject
    'sint
    ernal 49.Ani nv
    estmentoppor
    tuni
    tycost
    ing$400,000isexpect
    edtoy
    iel
    dnetcash
    rat
    eofr etur
    n(IRR)? fl
    owsof$75, 000annual
    lyforeightyear
    s. TheIRR oft
    heinv
    estmenti
    s
    A.14. 79% C.18.54% between
    B.16. 33% D.15.61% a.10and12%. c. 14and16%.
    Gleim b.12and14%. d.16and18%. D,
    L&H9e

    IRRGivenCashFlows,I
    gnoreIncomeTaxes 49.Ani nv
    estmentoppor
    tuni
    tycost
    ing$200,000isexpectedtoy
    iel
    dnetcash
    EvenCashFl ows,NoPr
    esentValueTabl
    e fl
    owsof$39, 000annual
    lyforeightyears.TheIRR ofthei
    nvest
    mentis
    xci
    v. Whati st
    heappr
    oximateIRRforaproj
    ectt
    hatcost
    s$50,
    000andpr
    ovi
    des between
    cashinf
    lowsof$20,
    000f or3year
    s? a.10and12%. c. 14and16%.
    A.10% C.22% b.12and14%. d.16and18%. L&H10e
    B.12% D.27%
    Glei
    m *
    . MLF Corporat
    ion is ev
    aluati
    ng the purchase ofa P500,000 die at
    tach
    machine.Thecashi nfl
    owsexpect edfrom thei nvest
    menti
    sP145,000per
    xcv
    . PenaCompanyi sconsider
    ingaprojectthatcal
    l
    sf orani
    nit
    ialcashout
    lay yearf
    orf i
    veyearswithnoequi pmentsalvagev alue.Thecostofcapit
    alis
    of$50,
    000.Theexpect
    ednetcashi nfl
    owsf rom theproj
    ectare$7,791for 12%.Thenetpr esentval
    uef actorf
    orfi
    v e(5)year sat12%i
    s3.6048andat
    eachof10year
    s.Whati
    stheIRRofthepr oj
    ect? 14%is3.4331.Theinter
    nalrateofret
    urnforthisinvest
    menti
    s(M)
    A.6% C.8% a.3.45% c. 13.8%
    B.7% D.9% b.2.04% d.15. 48% RPCPA1097
    Gl
    eim
    36.(I
    gnor eincomet axesinthisprobl
    em.)SueFal l
    sisthepresidentofSpor t
    s,Inc.
    xcv
    i. Whi chofthefoll
    owingstatementsismostl i
    kel
    ycorr
    ectforapr
    oject Shei sconsi der
    ingbuy i
    nganew machi net hatwoul dcost$14,125.Suehas
    cost
    ing$50,
    000andretur
    ning$14,000peryearfor5year
    s? determi nedthatthenew machi nepromisesai nternalrat
    eofr etur
    nof12%,
    A.NPV=$36, 274. C.IRR=1. 4%. butSue has mi spl
    aced the paperwhi ch tell
    st he annualcostsav ings
    B.NPV=$20, 000. D.IRRi sgreat
    ert
    han10%. promi sedbyt henew machi ne.Shedoesr emembert hatthemachi nehasa
    Glei
    m projectedlifeof10y ears.Basedonthesedat a,theannualcostsav ingsar e:
    (M)
    45.Ani nv
    estmentopportuni
    tycost
    ing$150,
    000i sexpectedtoy
    iel
    dnetcash a.i tisi mpossi
    bletodet er
    minefrom t
    hedat agiven.
    fl
    owsof$45, 000 annuall
    yforfiv
    ey ear
    s. TheI RR ofthei
    nvest
    mentis b.$1, 412.50.
    between c. $2, 500.00.
    a.10and12%. c. 14and16%. d.$1, 695.00. G&N9e
    CMAEXAMI NATIONQUESTI ONS Page42of42
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG
    c
    . FosterCompanyi sconsi deri
    ngt hepurchaseofanewmachi nefor$38, 000.
    40.(Ignorei ncomet axesint hi
    spr obl
    em. )JoeFl ubupist hepresidentofFl ubup, Themachi newouldgener ateanetcashi nf
    low of$11,607peryearf orfive
    Inc.Hei sconsideringbuy inganew machi nethatwoul dcost$25, 470.Joe years.Attheendoff i
    vey ears,t
    hemachi newouldhavenosal vagevalue.The
    hasdet erminedt hatthenew machi nepr omisesai nt er
    nalrateofr eturnof company ’
    s costofcapi talis12per cent.Thecompanyusesst r
    aight-l
    ine
    14%,butJoehasmi splacedt hepaperwhi cht el
    lstheannualcostsav i
    ngs depreciati
    onwithnomi d-yearconventi
    on.
    pr omisedbyt henew machi ne.Hedoesr emembert hatt hemachi nehasa Whati st heint
    ernalrateofr eturnforthemachi neroundedt othenear est
    pr oj
    ectedl i
    feof12y ears.Basedont hesedat a,theannualcostsav ingsar e: percent,assumingnot axesarepaid?
    (M) a.12% c. 14%
    a.i mpossi bl
    etodet erminefrom thedat agiven. b.18% d.16% H&M
    b.$2, 122.50.
    ci
    c. $4, 500.00. . BrownCor por
    ationrecent
    lypurchasedanewmachi nefor$339,
    013.
    20wi t
    ha
    d.$4, 650.00. G&N9e ten-yearl
    i
    fe.Theol dequipmenthasar emaini
    ngl i
    feofteny ear
    sandno
    disposalv
    alueatthet i
    meofr epl
    acement.Netcashfl
    owswi l
    lbe$60,000per
    xcv
    ii
    .
    Af i
    rm isconsideri
    ngapr oj
    ectr equi r
    ing ani
    nvestmentof$13, 500.The year.Whatistheint
    ernalr
    ateofr et
    urn?(
    E)
    projectwouldgenerateannualcashi nf l
    owsof$3,148peryearf orthenext7 a.12% c. 20%
    years.Thecompanyusest hestraight -
    li
    nemethodofdepr eciati
    onwi thno b.16% d.24% Hor ngren
    mid-yearconventi
    on.Ignoreincomet axes.Theapproxi
    matei nternalrat
    eof
    ci
    i
    returnfort
    heprojecti
    s .Soda Manuf actur
    ing Companypr ovi
    des vendi
    ng machi nes forsof t
    -drink
    a.6% d.14% manufacturers.The company has been i nvestigati
    ng a new pi ece of
    b.8% e. 18%. machineryforitsproducti
    ondepartment.Theoldequi pmenthasar emai ni
    ng
    c. 12% H&M l
    ifeofthreeyearsandt henewequi pmenthasav alueof$52,650wi t
    hat hree-
    yearli
    fe.Theexpect edaddit
    ionalcashinf
    lowsar e$25,000pery ear.Whati s
    xcv
    ii
    i
    . Af irmisconsider
    ingaprojectrequiri
    nganinvestmentof$100, 000.The theint
    ernalrateofretur
    n?(E)
    projectwouldgenerat
    eannualcashi nfl
    owsof$27,739peryearf orthenext5 a.20% c. 10%
    years.Thecompanyusest hest r
    aight-l
    inemethodofdepr eciati
    onwi t
    hno b.16% d.8% Horngren
    mid-yearconventi
    on.Ignor
    eincomet axes.Theapproxi
    matei nter
    nalrateof
    ci
    i
    i
    returnfort
    heprojecti
    s .TheZer onCor por
    ati
    onrecentlypurchasedanew machi neforitsfactory
    a.9% d.16% operationsatacostof$921, 250.Thei nvestmenti sexpectedtogener ate
    b.10% e. 28% $250,000i nannualcashfl
    owsf oraperi
    odofsi xy ears.Therequir
    edrateof
    c. 12% H&M retur
    ni s14%.Theol dmachinehasar emai ni
    ngl i
    feofsi xyears.Thenew
    machi neisexpectedtohavezer oval
    ueatt heendoft hesix-
    yearperi
    od.The
    xci
    x
    .Aninsurancefi
    rm agr
    eestopayyou$3,310attheendof20y ear
    sifyoupay disposalv al
    ueoftheoldmachi neatthetimeofr eplacementiszero.Whati s
    pr
    emi umsof$100pery earatt
    heendofeachy earf
    or20y ears.Fi
    ndt he theinternalrat
    eofret
    urn?(
    M)
    i
    nter
    nal r
    ateofret
    urntot
    henearestwhol
    epercent
    agepoint
    .(E) a.15% c. 17%
    a. 9% d. 3% b.16% d.18% Horngren
    b. 7% e. 11%
    c. 5% Br
    igham 57.(
    Ignor
    eincomet axesi
    nthi
    spr
    obl
    em.
    )Thef
    oll
    owi
    ngdat
    apertai
    nto an
    i
    nvest
    mentproposal
    :
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page43of43
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Presentinvestmentrequir
    ed $26,
    500 Discountrat
    e 10%
    Annual costsavi
    ngs $5,
    000 Theinternal
    rateofr
    etur
    nont
    hisi
    nvestmenti
    sclosestt
    o:(
    D)
    Project
    edl i
    feoftheinvest
    ment 10years a.23. 4%. c. 22.
    7%
    Project
    edsal v
    agev alue $-0- b.25. 4%. d.22.1% G&N9e
    Theinternalrateofr eturn,i
    nter
    pol
    atedtothenear
    estt
    ent
    hofaper cent
    ,
    wouldbe: (
    M) 61.(I
    gnoreincomet axesinthi
    sproblem.)Thefoll
    owingi
    nfor
    mat
    ionconcernsa
    a.11. 6%. c. 13.
    6%. proposedinvestment :
    b.12. 8%. d.12.4%. G&N9e Investmentrequired $14,
    150
    Annual savi
    ngs $2,
    500
    58.(I
    gnorei ncomet axesinthisproblem.
    )Thef oll
    owi
    ngdataareavai
    lableona Lif
    eoft heproject 12y ear
    s
    proposedi nvestmentpr oj
    ect: Theinternalrat
    eofr etur
    nis(donotint
    erpol
    ate)
    :(M)
    Init
    ialinvestment $142,500 a.14%. c. 10%.
    Annual cashinfl
    ows $30,000 b.12%. d.5%. G&N9e
    Lifeoft heinvestment 8years
    ci
    v
    Requi redrateofreturn 10% .WhitneyCr aneInc.hast hef
    ollowingi ndependenti
    nvest
    mentopport
    unit
    ies
    Thei nternalrateofr eturn,i
    nterpol
    atedtot henear
    esttent
    hofaper cent
    , fort
    hecomi ngyear :
    wouldbe: (M) Project Cost Annual CashI nfl
    ows Li f
    e(Years) IRR
    a.13. 3%. c. 15.
    3%. A $10, 000 $11,800 1
    b.12. 1%. d.12.7%. G&N9e B 5,000 3,075 2 15
    C 12,000 5,696 3
    59.(I
    gnorei ncomet axesi nt hi
    spr obl
    em.)Thef ol
    l
    owing datapertai
    nt o an D 3,000 1,009 4 13
    i
    nvestmentpr oposal
    : TheIRRsf orProjectsAandC, respect i
    vely
    ,are:(
    M)
    Presentinvestmentrequir
    ed $14,000 a.16%and14% d.18%and13%
    Annual costsavi
    ngs $2,500 b.18%and10% e. 16%and13%
    Projectedli
    feoftheinvestment 8year s c. 18%and20% Bri
    gham
    Projectedsalv
    agev alue $- 0-
    Requiredrateofreturn 6% cv
    .Genui
    ne ProductsI nc.requires a new machi ne.Two companies have
    Theinternalrateofr eturn,i
    nter
    polatedtothenear
    estt ent
    hofaper cent
    , submi
    ttedbids,andy ouhavebeenassi gnedthetaskofchoosingoneofthe
    wouldbe: (M) machi
    nes.Cashf lowanalysi
    si ndicatesthefol
    lowing:
    a.6.7%. c. 8.
    7%. Year MachineACashFl ow MachineBCashFlow
    b.9.3%. d.7.3%. G&N9e
    0 -$2,000 -
    $2,
    000
    1 0 832
    60.(
    Ignoreincomet axesi nthi
    sproblem.)Overl
    andCompanyhasgatheredt he
    2 0 832
    f
    oll
    owingdataonapr oposedinvestmentproj
    ect
    :
    3 0 832
    I
    nvestmentindepr eci
    ableequi
    pment $150,000
    4 3,877 832
    Annualcashflows $40,000
    Li
    feoftheequi pment 10year s Whati
    st heint
    ernalr
    at eofr
    eturnf oreachmachi ne?(M)
    Sal
    vagev al
    ue -0- a.IRRA=16%; IRRB=20% d.IRRA=18%; I
    RRB=24%
    CMAEXAMI NATIONQUESTI ONS Page44of44
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.IRRA=24%;
    IRRB=20% e. I
    RRA=24%;
    IRRB=26% B.16.
    4 D.17.
    3 B&M
    c. I
    RRA=18%;
    IRRB=16% Br
    igham
    cv
    i
    .Thecapitalbudgetingdi
    rectorofSparrowCor porati
    onisevaluat
    ingaproject
    EvenCashFl ow,Wi t
    hPr esentVal ueTabl e whichcosts$200, 000,i
    sexpectedt olastfor10y earsandproduceaft
    er-tax
    *. Whatisthedi scountedrateofr et
    ur n,tothenear estpercentofaninvestment cashflows,incl
    udingdepreciat
    ion,of$44,503pery ear.Ifthefi
    rm’scostof
    ofP100,000t hatgi
    vesanannual incomeofP12, 000overa15- y
    earperiod?(
    E) capit
    alis14per centanditstaxrateis40per cent,whatistheproj
    ect
    ’sIRR?
    Abridgedtableofpr esentv alueofP1. 00r eceiv
    edannual l
    y (E)
    forNy ears a. 8% d.- 5%
    N 6% 8% 10% 12% b.14% e. 12%
    15 9.712 8.559 7.606 6.811 c. 18% Bri
    gham
    a.6% c. 10%
    b.8% d.noneoft hese RPCPA1087 Ev enCashFlow,Wi t
    hPr esentValueTable
    cv
    ii
    .Apr oj
    ecthasacostof$5, 000andi sexpectedtopr oduceacashf l
    ow of
    *
    . Mr .Casti
    ll
    oisthinkingtobuyal athemachi neforP10,000.Thismachi newil
    l $1,
    220ay earforfi
    vey ears.Usingthetablegiven,
    whati sthei
    nter
    nalrat
    eof
    resultinannualcashi nfl
    owofP2, 000ay earforten-y
    earperiod.Belowi san ret
    urn?(Note:Annui t
    yfactorsareroundedtotwopl aces.)(E)
    abridgedtableshowi ngthepresentv al
    ueofannui tyofP1.00forNper i
    ods. Futur
    eVal ueofanAnnui ty Pr esentValueofanAnnui ty
    Years 14% 15% 16% of$1perPer i
    odfor5 of$1perPer iodfor5Peri
    ods
    9 4.946 4.772 4.607 Periods
    10 5.216 5.019 4.833 7% 5.
    75 4.10
    11 5.453 5.234 5.029 8% 5.
    87 3.99
    9% 5.
    98 3.89
    Usingt heshort
    -cutmet hod,t
    hedi scount edr at
    eofr et
    urnontheprojectis(E)
    10% 6.
    11 3.79
    a.13% c. 15%( 15.
    098%)
    b.14% d.16% RPCPA0581 A.9% C.7%
    B.10% D.8% CI
    Aadapted
    I
    RRGi venAfterTaxCashFl ows
    EvenCashFl ows,NoPresentValueTabl e *
    . Progr essiveCor porat
    ionacquiredanequi pmentatacostofP40, 500.Ithad
    26.Valent
    ineCompanyi sconsider
    inginvesti
    nginanewpr oject.Thepr
    ojectwil
    l an est imated lifeoft en years. Annualaf tertaxnetcash benef i
    tsare
    needaniniti
    ali
    nvest
    mentof$1, 200,000andwi l
    lgener
    ate$600,000(
    after
    -t
    ax) esti
    mat edt obeP10, 000att heendofeachy ear
    . Thef oll
    owingamount s
    cashfl
    owsf orthr
    eey ears.Cal
    culat
    et heIRRforthepr
    oject.(E) appeari nt heinteresttabl
    eforpr esentvalueofanannuityofP1aty earend
    A.14. 5% C.23.4% forteny ears:
    B.18. 6% D.20.2% B&M 20% 4.
    19
    22% 3.
    92
    30.Elephantcompanyi sinv
    esti
    nginagi antcrane.Itisexpect
    edtocost2. 2 24% 3.
    68
    mi l
    l
    ionini
    nit
    ialinv
    estmentanditi
    sexpectedtogenerat
    eanendofy earcash Whati st hemaxi mum r at
    ethatcoul dbepai dforthecapitalemployedover
    fl
    owof1. 0mill
    ioneachyearfort
    hreeyear
    s.Cal cul
    atet
    heIRRappr
    oximately
    . thelifeoft hisassetwi t
    houtlossont hi
    sproject?(
    M)
    (E) a.20% c. 22%
    A.14. 6 C.22. 1 b.21% d.23% RPCPA1080
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page45of45
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    2 -
    100, 000
    *
    . Jeroi
    g,Inc.placedP300, 000i nat en-yearproject.Theannualcashi nf
    low Oneanal ystsaysthatt hepr ojecthasanI RRofbet ween12and13per cent.
    aft
    erincomet axesf rom thisproj
    ectwasest imatedtobeP58, 500. The Theot heranalystcalcul atesanI RRofj ustunder800per cent
    ,butf earshis
    company ’scut-offrat
    eoni nvest
    ment soft hi
    sty pewas14%.I nf
    ormationon cal
    culator’
    sbat t
    eryisl owandmayhav ecausedaner ror
    .Youagr eetoset tl
    e
    thepresentvaluef act
    orsi
    s: the di
    sput e byanaly zing t he projectcash f l
    ows.Whi ch st
    atementbest
    at14% at15% descri
    best heIRRforthi spr oject?(D)
    PresentvalueofP1f ortenperiods 0.270 0.247 a.Ther eisasi ngl
    eIRRofappr oximately12.7percent.
    Presentv alueofanannui t
    yofP1f or 5. 216 5.019 b.Thi spr oj
    ecthasnoI RR,becauset heNPVpr ofi
    ledoesnotcr osst heX
    tenperiods axis.
    Thecompany ’
    sexpect edrateofret
    urnont hisinv est
    menti
    s(M)RPCPA0583 c. Therear emulti
    pleI RRsofappr oxi
    mat el
    y12.7per centand787per cent.
    a.14% c. Lesst han14%butmoret han0% d.Thi sprojecthastwoi maginaryI RRs.
    b.15% d.Lesst han15%butmoret han14% e. Therear eani nf
    ini tenumberofI RRsbet ween12. 5percentand790
    percentthatcandef inetheI RRf orthi
    sproject. Br i
    gham
    *
    . Scott ,I
    nc.ispl
    anningtoinv est$120,000ina10- yearproj
    ect.Scottesti
    mates
    thatt heannualcashi nf
    low,netofi ncomet axes,from thi
    spr ojectwil
    lbe Comprehensive
    $20,000.Scot t
    ’sdesiredr ateofr et
    urnoni nv estmentsoft histypeis10%. Questi
    ons73and74ar ebasedonthefol
    lowinginfor
    mation. Bar
    fiel
    d
    Informat i
    ononpr esentvaluef act
    orsisasf ol
    lows: For
    dem Co.isconsi
    deri
    ngani nv
    estmentinamachi nethatwouldreduceannual
    at10% at12% l
    aborcostsby$30,000.Themachinehasanexpect edlif
    eof10y earswi t
    hno
    Presentvalueof$1f ort enperi
    ods 0.386 0.322 sal
    vagevalue.Themachinewouldbedepr eci
    atedaccordingtothestrai
    ght-
    li
    ne
    Presentvalueofanannui tyof$1for 6.145 5.650 methodoverit
    suseful
    li
    fe.Thecompany'
    smar ginalt
    axrateis30percent.
    tenperiods
    Scott ’
    sexpectedrateofret urnonthisinvestmenti s 73.Assumet hatt
    hecompanywi l
    linvesti
    nt hemachineifitgener
    atesan
    a.Lesst han10%butmor et han0% c. Lesst han12%butmor ethan10% i
    nternalrateofret
    urnof16per cent
    .Whati sthemaximum amountt he
    b.10% d.12% AICPA1180I -
    26 companycanpayf orthemachi
    neandst il
    lmeettheint
    ernalr
    ateofret
    urn
    cri
    teri
    on?
    UnevenCashFl
    ow,NoPresentVal
    ueTabl
    e a.$180,000 c. $187,
    500
    20.Giv
    enthefol
    lowi
    ngcashf l
    owsforPr
    ojectM:C0=- 2,
    000,C1=+500,C2= b.$210,000 d.$144,996
    +1,
    500,C3=+1455,
    calcul
    atet
    heIRRf
    orthepr
    oject
    .(E)
    74.Assumethecompanypays$250,
    000fort
    hemachine.Whatist
    heexpect
    ed
    A.10% C.28% i
    nter
    nalr
    ateofr
    etur
    nonthemachi
    ne?
    B.18% D.Noneoftheabove B&M a.between8and9percent c. bet
    ween17and18percent
    b.between3and4percent d.lessthan1percent
    Mul ti
    pleI
    RRs
    cv
    ii
    i
    .Twof ell
    ow f
    inanci
    alanal
    yst
    sar
    eev
    aluat
    ingapr
    ojectwi
    tht
    hefoll
    owingnet MODI FIEDI RR
    cashflows: 27.ValentineCompanyi sconsi
    deri
    nginvesti
    nginanewpr oject.Theproj
    ectwil
    l
    Year CashFlow needani ni
    tiali
    nvestmentof$1,
    200,000andwi l
    lgener
    ate$600,000(af
    ter
    -t
    ax)
    0 -
    $10,000 cashf lowsf orthreeyear
    s. Calcul
    atetheMI RR( modifi
    edinter
    nalrat
    eof
    1 100,
    000 return)fortheprojecti
    fthecostofcapit
    alis15%.(E)
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page46of46
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    A.14.
    5% C.23.
    4% c. 12.
    0% Br
    igham
    B.18.
    6% D.20.
    2% B&M
    cxi
    .Belowar ether et
    ur nsofNul ookCosmet i
    csand“ themar ket”overathree-y
    ear
    31.El
    ephantcompanyi sinv
    esti
    ngi nagi antcrane.Itisexpect
    edt
    ocost2. 2 peri
    od:
    mill
    i
    oninini
    ti
    ali
    nvestmentanditisexpectedtogenerat
    eanendofyearcash Year Nulook Mar ket
    fl
    ow of1.0mi l
    l
    ioneachy earforthreey ear
    s. Calcul
    atetheMI
    RRf orthe 1 8% 6%
    proj
    ecti
    fthecostofcapi
    tali
    sapproximately12%APA.(E) 2 9 9
    A.15.3% C.23.8% 3 32 22
    B.17.3% D.22.1% B&M Nulookf inancesi nt
    ernall
    yusi ng onlyretained ear ni
    ngs,and i tusest he
    Capit
    alAssetPr icingModelwi thahi st
    oricalbet at odetermineitscostof
    ci
    x.Apr ojectrequir
    esani niti
    alcashinv est mentati t
    si ncept
    ionof$10, 000,and equit
    y.Cur r
    ently,therisk-f
    reer ateis7percent ,andt heesti
    mat edmar ketri
    sk
    noot hercashout f
    lowsar enecessar y.Cashi nflowsf rom thepr ojectoverits premium is6per cent .Nul ooki sevaluat
    ingapr ojectwhichhasacostt oday
    3-yearlif
    ear e$6,000att heendoft hef ir
    sty ear,$5,000att heendoft he of$2,028andwi llprovideestimat edcashi nfl
    owsof$1, 000att heendoft he
    secondy ear,and$2,000att heendoft hethirdy ear.Thef uturev alueint
    erest next3y ears.Whati sthisproject’
    sMI RR?(M)
    factorsforanamountof$1att hecostofcapi t
    al of8%ar e a.12. 4% d.20. 0%
    Per iod b.16. 0% e. 22.9%
    1 2 3 4 c. 17.5% Bri
    gham
    1.080 1.166 1.26 1.36
    Thepr esentv al
    ueinterestfact
    orsf oranamountof$1f ort hr
    eeper i
    odsar e INFLATI
    ONARYENVI RONMENT
    asf ol
    lows: RateofRet urn
    I
    nterestRat e Minimum Desi redRat eofRet ur
    n
    8% 9% 10% 12% 14% cxii
    . Youj ustpassedt heCPAl i
    censureexami nati
    onandt ooky ouroath.As
    .
    794 .772 .
    751 .712 .675 youst art
    edy ourpr acti
    ce,KonFuse,I nc.camet oyouf orhelpinest abl
    ishi
    ng
    Themodi fi
    edIRR(MIRR)f ortheprojecti scl
    osest o ami nimum desi r
    edr ateofr et
    ur ntobeusedi ntheev aluat
    ionofacapi tal
    a.8% c. 10% proj
    ectwi thaf ivey earli
    fe.Thef oll
    owingdat awer eprovided:(D)
    b.9% d.12% Infl
    ationr atef orthepast5y ears 13%
    Gl
    eim Expect edi nflati
    onrateforthenextf i
    vey ears 9%
    “Risk-fr
    ee”el ement 5%
    cx
    .AlyeskaSalmonInc.,alargesalmoncanni ngfi
    rm operati
    ngoutofVal dez, “Risk”pr emi um demandedf ortheproject 7%
    Alaska,hasanew aut omatedproduct ionli
    neproj
    ecti
    ti sconsideri
    ng.The Youwi lladvicet hecl i
    enttoconsiderami nimum desiredr ateofreturnof
    projecthasacostof$275, 000andi sexpectedtoprovideafter-
    taxannual a.20% c. 16%
    cash f l
    ows of $73,306 forei ghty ear
    s. The fir
    m’ s managementi s b.21% d.25% RPCPA0596
    uncomf ort
    abl
    e witht he IRR reinvestmentassumption and pr efer
    st he
    modi fi
    edIRRapproach.Youhav ecal culat
    edacostofcapitalf
    ort hefir
    m of Nomi nalRateofInt
    erest
    12per cent
    .Whatistheproject
    ’sMI RR?( M) 14.Ther ealrat
    eofi nt
    eresti
    s3%andt
    hei
    nfl
    ati
    onis4%.Whati
    sthenomi
    nal
    a.15. 0% d.16.0% rateofinter
    est?
    b.14. 0% e. 17.
    0% A.3% C.7.12%
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page47of47
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    B.4% D.1% B&M theNPVofthepr


    ojectatt
    hedi
    scountr
    ateof10%.
    A.$11.62 C.$100.00
    16.Thereali
    nter
    estr
    atei
    s3%andt
    hei
    nfl
    ati
    onratei
    s6%.Whati
    sthenomi
    nal B.$65.00 D.Cannotbecal
    cul
    atedasg>gB &
    i
    nter
    estrat
    e? M
    A.3% C.9.2%
    B.4% D.1% B&M I
    nvestmentDeci sion
    27.Youown100acr esoftimberl
    and,wi thy oungt i
    mberwor th$20,000iflogged
    RealI
    nterestRate today.Thisrepr esents500cordsofwoodat$40percor d.Afterloggi
    ng,the
    17.I
    fthenomi nali
    nter
    estr
    atei
    s8.
    1%andthei
    nfl
    ati
    onr
    atei
    s4%,whati
    sther
    eal l
    andcanbesol dt odayfor$10,000( $100peracr e).Theoppor t
    unitycostof
    i
    nterestrat
    e? capit
    ali
    s10%.Youhav emadet hef oll
    owi ngestimates:
    A.3. 85% C.4% i
    ) Thepr iceofacor dofwoodwi l
    lincreaseby5%pery ear.
    B.8% D.Noneoftheabov
    e B&M i
    i) Thepriceofl andwi lli
    ncr
    easeby3%pery ear.
    i
    ii)They earlygr owt hrateofthemut ualcordsofwoodony ourlandar e:
    CashFlow year
    s1- 2:15%; year
    s3-4:10%;year s5- 8:
    5%; yearst
    hereaft
    er:2%.
    RealCashFl ow Thepresentv alueoft heopti
    mal decisionisappr oxi
    mately:
    15.Acashf lowrecei
    vedi
    ntwoyearsi
    sexpect
    edtobe$11,
    236.Ifther
    ealr
    ate A.$30,000 C.$34, 250
    ofinter
    estis4% andthei
    nfl
    ati
    onrat
    eis6%,whati
    stherealcashfl
    ow f
    or B.$32,800 D.$34, 315 B&M
    year2?
    A.$11, 236 C.$10,
    000 28.Youown100acr esoft i
    mber l
    and,wi thyoungt i
    mberwor th$20,000iflogged
    B.$10, 388 D.$9,
    246 B&M today.Thi srepresents500cor dsofwoodat$40percor d.Afterloggi
    ng,the
    l
    andcanbesol dt odayf or$10,000( $100peracr e).Theoppor t
    unitycostof
    Nomi nal
    CashFl ow capit
    al i
    s10%.Youhav emadet hefoll
    owingestimates:
    19.Realcashf l
    owoccur
    ri
    ngi ny
    ear2is50,
    000.Ift
    heinfl
    ati
    onrat
    eis10%per i
    ) Thepr iceofacor dofwoodwi l
    li
    ncreaseby5%pery ear.
    year,
    calcul
    atenomi
    nalcashf
    lowf
    oryear2. i
    i) Thepr iceoflandwi l
    lincr
    easeby3%pery ear.
    A.60, 500 C.55,000 i
    ii)They earlygrowt hrateoft hemut ualcordsofwoodony ourlandar e:
    B.50, 000 D.Noneoft heabove B&M years1- 2:15%; years3-4:10%; years5-8:
    5%; yearst
    hereaft
    er:2%.
    Theopt i
    mal deci
    sioni stosellafter
    :
    NetPresentValue–I nf
    ini
    teLif
    e A.8y ears C.4y ears
    29.Youhav ebeenaskedt oevaluateapr ojectwi
    thi nfini
    teli
    fe.Sal
    esandcosts B.5y ears D.3y ears B&M
    arepr oj
    ect
    edt obe$1000and$500r espect
    ively.Ther eisnodepreci
    ati
    on
    andt hetaxrateis30%.Ther ealrequiredrat
    eofr etur
    nis10% Theinfl
    ati
    on POI NTOFI NDIFFERENCE–COSTOFCAPI TAL
    rat
    ei s4%andi sexpectedtobe4%f orever.Sal esandcost swi
    lli
    ncr
    easeat RequiredInvestment
    cxi
    i
    i
    therateofinfl
    ati
    on.Ift
    heprojectcosts$3000, whati stheNPV? .At
    heyAi rl
    i
    nesisconsideri
    ngtwomutuall
    yexcl
    usiv
    eprojects,Pr
    ojectAand
    A.$240. 74 C.$500. 00 Pr
    ojectB.Theproject
    shavethefol
    l
    owi
    ngcashflows(i
    nmi l
    li
    onsofdol l
    ars)
    :
    B.$1629. 62 D.Noneoft heabove B&M Year Proj
    ectACashFl
    ow Proj
    ectBCashFl ow
    0 -
    $4.
    0 ?
    30.Aproj
    ectcosts$100today.I
    thassal
    esof$100peryearf
    orever
    .Costswil
    l 1 2.0 $1.7
    be$50thefir
    styearandincr
    easeby19%peryear
    .Ignori
    ngtaxescal
    cul
    ate
    CMAEXAMI NATIONQUESTI ONS Page48of48
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    2 3.0 3.2 and2peri


    odsare0.86957and0.75614,respect
    ivel
    y.Thepresentval
    ueof1
    3 5.0 5.8 at8%endofperi
    od1i s0.
    92593andperiod2i s0.
    85734.
    The crossover r
    ate of t
    he two proj
    ects’NPV pr of
    il
    es is 9 percent
    . Atwhatdi
    scountr
    atewouldMachine1equal l
    yacceptabl
    easmachine2?(D)
    Consequentl
    y,whentheWACCi s9percenttheproj
    ect
    shav ethesameNPV. A.9% C.11%
    WhatisthecashflowforPr
    ojectBatt=0?(M) B.10% D.12% RPCPA0503
    a.-$4.22 d.+$4. 22
    b.-$3.49 e. -
    $4.51 Quest
    ions75and76ar ebasedonthefol
    lowinginformat
    ion. Barfi
    eld
    c. -
    $8.73 Bri
    gham Thenetaft
    er-t
    axcashflowsassoci
    atedwit
    ht wopr oj
    ect
    sunderconsiderati
    onby
    Novel
    leCo.foll
    ow:
    EvenCashFl ow Pr oj
    ect1 Project2
    16.PDLTI nvestmentwhi chhasawei ght edav eragecostofcapitalof12% is I
    nit
    iali
    nvestment $(300,000) $(
    100, 000)
    evaluating two mut ual l
    y exclusi
    ve pr oject
    s( X and Y)
    ,whi ch hav ethe Cashfl
    owsy ears1-
    5 80,
    000 30,000
    fol
    lowingpr ojecti
    ons:
    ProjectX Pr
    ojectY 75.Whati
    stheFi
    sherr
    atefort
    heset
    wopr
    oject
    s?(D)
    Investment P48, 000 P83,225 a.l
    essthan1per
    cent c. bet
    ween4and5per
    cent
    Af t
    er -
    taxcashinflow 12, 000 15,200 b.bet
    ween7and8percent d.between6and7per
    cent
    Assetl if
    e 6y ears 10year s
    Thef i
    sherr ateforthet woprojectsi
    s 76.Assumet hatthecompanycanpot ent
    ial
    lyacceptbot
    hproj
    ects,oneproj
    ect
    ,
    A.12. 64% C.16. 01% ornei
    therproj
    ect.Whichproj
    ect(
    s)wouldthecompanyacceptifi
    testi
    mates
    B.12. 00% D.19. 33% PolBobadi
    ll
    a i
    tsweightedaveragecostofcapi
    tal
    is9percent?
    a.bothpr oj
    ects c. Project2
    cxi
    v. Suzi eownsacomput erresell
    ingbusi nessandisexpandi ngherbusiness. b.Project1 d.nei t
    herproj
    ect
    Suzieispr esentedwi thonepr oposal ,ProposalA,sucht hattheest i
    mat ed
    i
    nv est
    mentf ortheexpansi onpr ojectis$85,000,anditisexpectedtoproduce Unev enCashFl ow
    cxv
    cashflowsaf tert axesof$25, 000f oreachoft henext6y ears.Anal t
    ernate .Twopr oject
    sbeingconsideredar emutual
    l
    yexcl
    usi
    veandhav ethef
    oll
    owing
    proposal,ProposalB,i nvolv
    esani nvestmentof$32, 000andaf t
    er-
    taxcash proj
    ectedcashf l
    ows:
    fl
    owsof$10, 000f oreachoft henext6y ears.Thecostofcapi talt
    hatwoul d Year Pr
    ojectACashFl ow Pr
    ojectBCashFlow
    makeSuzi eindifferentbetweent heset wopr oposal
    sliesbetween 0 -$50,000 -$50,000
    a.10%and12% c. 16%and18% 1 15,990 0
    b.14%and16% d.18%and20% 2 15,990 0
    Gl
    eim 3 15,990 0
    4 15,990 0
    57.BerryProductsisconsider i
    ngtwopiecesofmachi nery.Thefir
    stmachi ne 5 15,990 100,
    560
    costsP50,000mor et hant hesecondmachi ne.Dur ingthetwo-
    yearlif
    eof Atwhatr ate(approxi
    mately)dot heNPVprof
    il
    esofProject
    sAandBcr oss?
    thesetwoalter
    nati
    ves, t
    hef i
    rstmachi
    nehasP155, 000mor ecashfl
    owi nyear (D)
    oneandaP110, 000lesscashf l
    owiny eart
    wot hant hesecondmachine.All a. 6.5%
    cashflowsoccuraty ear-end.Thepresentvalueof1at15%endof1per iod b.11. 5%
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page49of49
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    c. 16.
    5%
    d.20.0% PresentVal ueofCost s
    e. TheNPVpr
    ofi
    l
    esoft
    heset
    wopr
    oject
    sdonotcr
    oss. Br
    igham cxvi
    ii
    .Uni on Elect r
    ic Companymustcl ean up the wat erreleased from i t
    s
    gener ati
    ngpl ant.Thecompany 'scostofcapi t
    alis11per centf oraverage
    EVALUATI ONOFI NVESTMENTALTERNATI VES projects,andt hatr ateisnormallyadj ustedupordownby2per centage
    NetPr esentVal ue pointsf orhigh-andl ow-ri
    skproj
    ects.Cl ean-
    UpPl anA,whi chi sofav erage
    cxv
    i. TheU. S.Post alServ
    iceislookingf oranewmachi net
    ohel psortthemai l
    . ri
    sk, hasani niti
    alcostof$10mi l
    li
    on,andi tsoperati
    ngcostwi llbe$1mi l
    li
    on
    Twocompani eshav esubmi ttedbi dst oCliffKraven,t
    hepost alinspector pery earf orit
    s10- yearlif
    e.Pl
    anB,whi chi sahigh-r
    iskproj
    ect ,hasani nit
    ial
    responsi bl
    ef orchoosi ng a machi ne.A cash f l
    ow analysi
    s oft he two costof$5mi l
    lion,andi t
    sannualoperatingcostov erYears1t o10wi l
    lbe$2
    machi nesi ndicat
    est hefoll
    owing: mill
    ion.Whati stheappr oxi
    matePVofcost sf
    orthebetterproject?(VD)
    Year Machi neA MachineB A.- $5.9mi l
    l
    ion. C.- $16.8mi l
    l
    ion.
    0 -$30,000 -$30,000 B.- $15. 9mi l
    li
    on. D.- $17.8mi l
    l
    ion. Glei
    m
    1 0 13,000
    2 0 13,000 Weighted-AverageCostofCapi t
    al (WACC)
    3 0 13,000 cxi
    x. Mul vaInc.isconsi deri
    ngt hef ollowi ngfivei ndependentpr oj
    ects:
    4 60,000 13,000 Project Requir edAmountofCapi t
    al I
    RR
    Ifthecostofcapi t
    alfort hePost alSer vi
    cei s8%,whichoft hetwomai l A $300, 000 25.35%
    sor t
    ersshoul dCliffchooseandwhy ?( M) B 500, 000 23.22%
    A.Machi neA, becauseNPVA>NPVB, by$1,044. C 400, 000 19.10%
    B.Machi neB, becauseNPVA<NPVB, by$22,000. D 550, 000 9.
    25%
    C.Machi neA, becauseNPVA>NPVB, by$8,000. E 650, 000 8.
    50%
    D.Machi neB, becauseI RRA<I RRB. Thecompanyhasat argetcapi talst r
    uct ur
    ewhi chis40per centdebtand60
    Gleim percentequi t
    y.Thecompanycani ssuebondswi t
    hay ieldtomat uri
    tyof10
    percent.Thecompanyhas$900, 000i nret ainedear nings,andt hecurrent
    cxv
    ii. RohanTr anspor ti
    sconsi deri
    ngt woal t
    ernativebusest otranspor tpeople stockpriceis$40pershar e.Thef lotationcost sassociatedwi thissuingnew
    betweenci ti
    est hatareint heSout heast ernU. S.,suchasBat onRougeand equityare$2pershar e.Mul va'sear ningsar eexpect edt ocont i
    nuet ogrowat
    Gainesv i
    ll
    e.Agas- poweredbushasacostof$55, 000,andwi llproduceend- 5per centpery ear.Nexty ear'
    sdi v
    idend( D1)i sf orecastedtobe$2. 50.The
    of-y
    earnetcashf lowsof$22, 000pery earfor4y ears.Anewel ectricbuswi l
    l fi
    rmf acesa40per centt axrat e.Whati sthesi zeofMul va'
    scapi talbudget?
    cost$90, 000,andwi llproducecashf lowsof$28, 000pery earf or8y ears. (D)
    Thecompanymustpr ov
    idebusser vicef or8y ears,afterwhichi tplanst o A.$1, 200,000 C.$2, 400,000
    give up itsf ranchise and to cease oper ati
    ng t he route.Inf l
    ation is not B.$1, 750,000 D.$800, 000 Gl
    eim
    expect edtoaf fecteit
    hercost sorr evenuesdur ingthenext8y ear s.IfRohan
    Transpor t'
    scostofcapi tali
    s17per cent,bywhatamountwi llt hebetter PROJECTSCREENI NGMETHOD
    projectincreaset hecompany 'svalue?( D) Si
    nglePr oject
    A.$5, 350 C.$10, 701 *. UniversalCor p.isrevi
    ewi
    ng a capi
    talbudgeti
    ng decisi
    on regardi
    ng t
    he
    B.- $17,441 D.$27, 801 acquisitionofacapi
    tal
    equi
    pment.Bel
    owar etherel
    evantinf
    ormation:
    Gl eim Inv estment P300,000

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page50of50
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    PVofnetcashi nfl
    ows 200,
    000 Annual cash
    Cash- flowt axshieldfrom depr eciation 100,
    000 i
    nfl
    ow
    Thecompanyi susedt ohav easbenchmar kf orsimil
    arproj
    ect
    sanexcess Year1 130 200 160 190
    presentv alueindexof0. 50, t
    hatis, t
    hepr oj
    ect’
    sindexshouldbenolesst
    han 2 140 270 190 250
    0.
    50.Shoul dthisprojectbepur sued?( M) 3 160 180 180 180
    a.No, sincetheexcesspr esentv alueindexi s0.33 4 80 130 160 120
    b.Yes, sincet heexcesspr esentv alueindexis0. 67
    c. No, sincetheexcesspr esentv alueindexi sl
    esst han0.50 Netpr esent (
    7.500) 8.552 28.128 29. 324
    d.Yes, sincet heexcesspr esentv alueindexis1. 50 RPCPA0597 value
    Profit
    abili
    ty 98% 101% 106% 105%
    *
    .At ax-exemptf oundat i
    on,Si ncerel
    yFoundat ion,I nc.i ntendst oi nvestP1 I
    ndex
    mil
    lioni naf i
    v e-y
    earpr oject. Thef oundati
    onest i
    mat est hatt heannual I
    nternal r
    ateof 11% 13% 14% 15%
    savingsf rom t hepr ojectwi l
    lamountt oP325, 000.TheP1mi lli
    onassetis ret
    ur n
    depreciableov erf i
    ve( 5)y earsonast rai
    ght-l
    inebasi s. Thef oundati
    on’
    s I
    fthe companyhas no budgetarylimit
    ati
    ons,whi ch pr oject
    s shoul
    d be
    hurdler ateis12% andasaconsul tantoft hef oundat ion,youar easkedto pur
    sued?( E)
    determi net hei nternalrateofr eturnandadv isei fthepr ojectshoul dbe a.Pr oject1. c. Pr
    ojects2,3and4.
    pursued. b.Pr ojects3and4. d.Allthefourpr
    oject s. RPCPA1096
    Tof acil
    itat
    ecomput ati
    ons,bel owar epr esentvaluef actors:
    N=5 12% 14% 16% *
    . Thefoll
    owingdat ar
    elat
    et otwocapi tal
    -budget
    ingproj
    ectsofequalri
    sk:
    Presentv alueofP1 0.57 0.52 0.48 PresentValueofCashFl ows
    Presentv al ueofanannui ty 3. 60 3.40 3.30 Period ProjectA Proj
    ectB
    ofP1 0 $(
    10, 000) $(
    30,000)
    Youradv i
    cei s(M) 1 4,550 13,650
    a.Topr oceedduet oanest imat edI RRofl esst han14%butnotmor et
    han 2 4,150 12,450
    12%. 3 3,750 11,250
    b.Topr oceedduet oanest imat edI RRofl esst han16%butnotmor et
    han Which oft he proj
    ects wil
    lbe sel ected usi
    ng the pr
    ofi
    tabil
    it
    yindex(PI
    )
    14%. approachandt heNPVappr oach?
    c. Nott oproceedduet oanest imatedI RRofl esst han12%. CIA 0586IV- a. b. c. d.
    d.Topr oceedduet oanest i
    mat edIRRofmor et han16%. RPCPA1095 33
    PI B Ei
    ther Ei
    ther B
    Unl
    imit
    edCapi t
    al NPV A B A B
    *. SBCo.usesa12%hurdlerat
    eforallcapitalexpendit
    ures.Ithasli
    nedupf
    our
    pr
    ojectsandbel
    owisthesummaryt hereof. RANKI NGOFI NVESTMENTALTERNATI VESANDPROJECTSELECTI ON
    InThousandPesos Capit
    al Budget
    Proj
    ect1 Proj ect2 Pr oject3 Pr oject4 cxx. Acompany '
    smarginalcostofnewcapi
    tal(MCC)i s10%upt o$600,000.
    I
    niti
    al cash 400 596 496 544 MCCi ncr
    eases.5%forthenext$400,
    000andanot her.
    5%thereaft
    er.Sever
    al
    outf
    low proposedcapitalpr
    ojectsareunderconsi
    derat
    ion,withpr
    ojectedcostand
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page51of51
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    i
    nternalratesofretur
    n(I
    RR)asfoll
    ows: c. Pr
    ojectAandProj
    ectBwil
    lhav
    ethesamenetpresentv
    alue. H&M
    Project Cost IRR d.Itisnotpossibl
    et oanswerthequest
    ionbasedupont heinf
    ormat
    ion
    A $100,000 10.5% pr
    ovided.
    B $300,000 14.0%
    C $450,000 10.8% cxxi
    . Ift hei nv
    est
    mentprojectsli
    sted bel
    ow aremut ual
    lyexcl
    usive,whi
    ch
    D $350,000 13.5% al
    ternat
    iveshoul
    dbeaccepted?
    E $400,000 12.0% Project A B C D
    Whatshoul dt hecompany'
    scapi
    talbudgetbe? NPV $100,
    000 ($20,000) $60,
    000 $30,000
    A.$0 C.$1,500,
    000 A.Pr ojectA. C.Proj
    ectsAandC.
    B.$1, 050,000 D.$1,600,
    000 CI
    A0589I
    V- B.Pr ojectB. D.Proj
    ectsA,C,andD.CIA 0595 I
    V-
    55 38
    cxxi
    i
    Mutuall
    yExclusi
    ve .
    Fiv
    emut uall
    yexclusi
    veproj
    ectshadt
    hefol
    lowi
    ngi
    nfor
    mation:
    40.Whichoft hefol
    lowingr
    esult
    softhenetpr esentval
    uemet
    hodi
    ncapi
    tal A B C D E
    budgeti
    ngistheLEASTaccept
    abl
    e?(E) NPV $500 $(200) $100 $200 $1,
    000
    a.$( 10,
    000) c. $(
    18,000) IRR 12% 8% 11% 13% 10%
    b.$( 7,
    000) d.$0 Hor
    ngr
    en Whichprojecti
    spr ef
    err
    ed?(M)
    a.A d.D
    34.Theproj
    ectshavethefol
    l
    owi
    ngNPVsandpr ojectli
    ves. b.B e. E
    Pr
    oject NPV Lif
    e c. C H&M
    Pr
    ojectA $5,000 4years
    cxxi
    i
    i
    Pr
    ojectB $7,000 7years . Fivemutual
    lyexclusivepr oj
    ect
    shadt
    hef oll
    owi
    nginfor
    mat
    ion:
    I
    fthecostofcapit
    ali
    s12%,whi
    chprojectwouldy ouaccept? V W X Y Z
    A.A C.Bot hAandB NPV $5,
    000 $10,000 $(3,000) $20,000 $15, 000
    B.B D.Rej ectbothAandB B&M I
    RR 10% 12% 8% 11% 13%
    Whichpr
    ojecti
    spreferred?
    56.Afir
    mi sconsi deri
    ngtwomut ual
    lyexclusi
    veproj
    ectswi
    ththefol
    lowi
    ngcash a.V d.Y
    fl
    ows: b.W e. Z
    ProjectA Proj
    ectB c. X H&M
    Year1 $20,000 $60,000
    cxxi
    v
    Year2 $40,000 $40,000 . Ast hedirect
    orofcapitalbudget ing f
    orDenverCorporati
    on,you ar
    e
    Year3 $60,000 $20,000 ev
    aluat
    ingt
    womut ual
    l
    yexclusi
    vepr ojectswit
    hthef
    oll
    owingnetcashflows:
    Eachpr ojectr equir
    esaninvestmentof$50, 000.Thecostofcapit
    ali
    s10 Year Proj
    ectXCashFl ow Proj
    ectZCashFl ow
    percent . 0 -$100,000 -
    $100,000
    Whichpr ojectwi l
    lhavet
    hehi
    ghernetpr esentval
    ue? 1 50,000 10,000
    a.Pr ojectA 2 40,000 30,000
    b.Pr ojectB 3 30,000 40,000
    CMAEXAMI NATI ONQUESTI ONS Page52of52
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    4 10,
    000 60,
    000
    I
    fDenver’
    scostofcapi
    tali
    s15percent
    ,whichpr
    ojectwoul
    dy ouchoose?(E) Questi
    ons55and56ar ebasedont hef ol
    lowingi nfor
    mat i
    on. CMA12914- 8&9
    a.Neitherproj
    ect
    . d.Pr oj
    ectX,sincei thast hehigher MerckenIndustri
    esi scont empl at
    ingfourpr ojects,Proj
    ectP, Proj
    ectQ, Proj
    ectR,
    NPV. andProjectS.Thecapi talcostsandest imatedaf ter-t
    axnetcashf l
    owsofeach
    b.ProjectX,si
    nceithasthehi
    gherIRR. e. Pr oj
    ectZ,si nce i
    thas t he mutuall
    y exclusive pr oject ar el i
    sted bel ow. Mer cken' s desi
    red af t
    er-
    tax
    hi
    gherIRR. opport
    unitycostis12%,andt hecompanyhasacapi talbudgetf orthey earof
    c. Pr
    ojectZ,si
    nceithasthehi
    gherNPV. Br
    igham $450,
    000.Idlefundscannotber einvestedatgr eaterthan12%.
    ProjectP Pr ojectQ Pr ojectR Pr ojectS
    cxxv
    .
    Twopr oject
    sbeingconsideredar emut ual
    lyexclusiv
    eandhav ethefol
    l
    owi ng I
    niti
    alcost $200,000 $235, 000 $190, 000 $210, 000
    projectedcashflows: Annualcashf l
    ows
    Year Proj
    ectACashFl ow Proj
    ectBCashFl ow Year1 $93,000 $90,000 $45,000 $40,000
    0 -$50,000 -$50,000 Year2 93,000 85,000 55,000 50,000
    1 15,625 0 Year3 93,000 75,000 65,000 60,000
    2 15,625 0 Year4 -0- 55,000 70,000 65,000
    3 15,625 0 Year5 -0- 50,000 75,000 75,000
    4 15,625 0 Netpresentvalue $23,370 $29,827 $27,333 $(7,
    854)
    5 15,625 99,500 I
    nternalr
    ateofr eturn 18.7% 17.6% 17.2% 10.6%
    Ifther equir
    edrateofretur
    nont hesepr oj
    ectsis10per cent,whichwouldbe Excess presentv alue 1.
    12 1.
    13 1.
    14 .
    96
    chosenandwhy ?(E) i
    ndex
    a.Pr ojectBbecausei
    thast hehi gherNPV.
    b.Pr ojectBbecausei
    thast hehi gherIRR. cxxvi
    .Duri
    ngthi
    syear
    ,Merckenwi
    l
    lchoose
    c. Pr ojectAbecauseithast hehigherNPV. A.Proj
    ect
    sP,Q,andR. C.Pr
    oject
    sQandR.
    d.Pr ojectAbecauseithast hehigherIRR. B.Proj
    ect
    sP,Q,R,andS. D.Pr
    oject
    sPandQ.
    e. Nei ther,
    becausebothhav eIRRsl essthanthecostofcapi tal
    . Br igham
    cxxvi
    i
    .IfMerckeni
    sablet
    oacceptonlyoneproject,
    t hecompanywoul
    dchoose
    *
    . Each ofthree mutuall
    yexcl usive proj
    ects cost
    s$200. Using t
    he t
    able A.Proj
    ectP.
    prov
    ided,r
    ankthepr oj
    ectsi ndescendingNPVor der.(
    M) B.Proj
    ectQbecausei
    thasthehighestnetpresentv al
    ue.
    Pr
    esentVal ue Proj
    ect’
    sCashFl
    ow C.Proj
    ectPbecausei
    thasthehighestint
    ernalrateofret
    urn.
    Year Int
    erestFact or A B C D.Proj
    ectPbecausei
    thastheshortestpaybackper i
    od.
    (10%)
    1 .91 $300 $200 $ 0 *
    . Acapit
    albudget i
    ngdeci sionmodelhaspr ovi
    dedthefoll
    owi ngi nf
    ormat
    ion:
    2 .83 200 100 100 ProposalA Proposal B
    3 .75 100 0 100 Investment P1,000,
    000 P1,800,000
    4 .68 0 100 200 Profit
    abili
    tyIndex 1.
    2 2.1
    5 .62 0 200 300 Netpr esentVal ue P600,
    000 P300, 000
    a.A, B,C. c. C,B,A. Thebestprojecti
    s( sit
    uationi
    simpossible)
    b.B, A,C. d.A, C,B. CI
    A0585IV-33 a.Proposal Abecausei thasthehi
    ghestpresentval
    ue.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page53of53
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.ProposalBbecausei
    thasthehi
    ghestpr
    ofit
    abil
    it
    yindex. andt
    hecostofcapi
    tal
    is15%.
    c. Pr
    oposalBbecausei
    tsprof
    it
    abi
    li
    tyi
    ndexisover2.0 A.Machi
    neAast heEACis$1789.
    89C.Don'
    tbuyei
    thermachi
    ne
    d.ProposalAbecauseithasthehi
    ghestnetpresentval
    ueev
    enthoughi
    ts B.Machi
    neBast heEACis$1922.
    88 B&M
    i
    nvest
    mentbaseinsmall
    er. RPCPA0595
    Inter nalRateofRet urn
    ExcessPr esentValueIndex Mut uall
    yexclusiveproject s
    *. TelephoneCor p.iscontemplati
    ngfourpr oj
    ects:L,M,N,andO.Thecapi tal Inter nalRateofRet urn
    cxxv
    ii
    i
    costsf ortheinit
    iati
    onofeachmut uall
    y-
    exclusi
    veprojectanditsesti
    mated . Twopr oj
    ectsbei ngconsi deredbyaf i
    rm ar
    emut uallyexclusi
    veandhave
    after
    -tax,netcashf low ar
    elist
    edbel ow. Thecompany ’
    sdesi r
    edafter
    -tax thefoll
    owingpr oj
    ect edcashf lows:
    opportunitycostsis12%.I thasP900, 000capitalbudgetfortheyear
    .I dle Year Proj
    ectACashFl ow ProjectB CashFl ow
    fundscannotber einvest
    edatgr eat
    erthan12%. 0 ($100,000) ($100,000)
    I
    nThousandPesos 1 39,
    500 0
    L M N O 2 39,
    500 0
    Initi
    alcost 400 470 380 420 3 39,
    500 133,
    000
    Annual cashf l
    ows Basedonl yont hei nformationgi ven,whichoft het wopr oject
    swoul dbe
    Year1 113 180 90 80 pref
    erred,andwhy ?( M)
    2 113 170 110 100 a.Pr ojectA,becausei thasashor terpaybackperi
    od.
    3 113 150 130 120 b.Pr ojectB,becausei thasahi gherIRR.
    4 113 110 140 130 c. Indi
    fferent,
    becauset hepr oj
    ectshav eequalI
    RRs.
    5 113 100 150 150 d.I ncl
    udebot hint hecapitalbudget ,sincethesum oft hecashi nfl
    ows
    exceedst heini
    tial i
    nvestmenti nbothcases.
    Netpresentvalue P7,
    540 P59,654 P54,666P(
    15,708) e. Choosenei ther,sincetheirNPVsar enegati
    ve. Br
    igham
    Int
    ernalr
    ateof 12.
    7% 17.
    6% 17.
    2% 10. 6%
    ret
    urn PaybackPer i
    od
    Excesspresent 1.
    02 1.
    13 1.
    14 0.
    96 Questi
    ons18&19ar ebasedont hefol
    l
    owi nginf
    ormation. Gi
    tman
    val
    ueindex Af ir
    m i s evaluat
    ing two project
    st hatar e mutuall
    y exclusive wit
    hinit
    ial
    Thecompanywi l
    lchoose(
    E) i
    nvestment sandcashf l
    owsasf oll
    ows:
    a.Proj
    ectsM, NandO. c. Proj
    ect
    sLandN. Pr
    oject
    : A Pr oj
    ect:B
    b.Proj
    ectsM andN. d.Pr oj
    ect
    sLandM. RPCPA0595 Init
    ial End-of-
    Year Ini
    ti
    al End-of-
    Year
    I
    nvestment CashFlows I
    nvestment CashFlows
    EAC $40,000 $20,000 $90,000 $40,000
    35.Two machines,A and B,which perf
    orm the same functi
    ons,havethe 20,
    000 40,
    000
    fol
    l
    owingcostsandl
    ives. 20,
    000 80,
    000
    Type PVCosts Li
    fe
    MachineA $6000 5 18.I
    fthef
    ir
    mi nFi
    gure901hasar equi
    redpay
    backoftwo(2)year
    s,t
    heyshoul
    d
    MachineB $8000 7 A.acceptpr
    ojectsAandB. C.rej
    ectproj
    ectAandacceptB.
    Whichmachinewoul
    dy ouchoose?Thet womachinesar
    emut uall
    yexcl
    usi
    ve B.acceptpr
    ojectAandrej
    ectB. D.rej
    ectboth.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page54of54
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Capit
    alRationing
    19.Thenewfinancialanal
    ystdoesnotli
    kethepaybackapproachanddeter
    mines NetPresentVal ue
    thatt
    hefi
    rm'sr equi
    redrateofret
    urnis15%.Hi srecommendati
    onwoul dbe *. TheNat iv
    ityCor por
    ati
    onhast hef oll
    owi nginvestmentoppor tuni
    ti
    es:
    to Proposal Profi
    tabili
    tyIndex Ini
    tialCash
    A.acceptprojectsAandB. C.rejectproj
    ectAandacceptB. Out l
    ay
    B.acceptprojectAandr ej
    ectB. D.rejectboth. 1 1.15 P200,000
    2 1.13 125,000
    ReplacementChai n 3 1.11 175,000
    33.OM Const ruct
    ion Companymustchoose bet ween two t ypes ofcr anes. 4 1.08 150,000
    CraneA cost s$600, 000,wi lll
    astf or5y ears,andwi l
    lr equir
    e$60, 000in Thefirm hasabudgetconst raintofP300, 000.
    mai ntenanceeachy ear.CraneBcost s$750,
    000andwi l
    ll
    astf orsevenyears. Whatpr oposal(s)shoul
    dbeaccept ed?( D)
    Mai ntenancecost sforcraneBar ei ncur
    redatt heendofeachy ear
    . The a.Pr oposal 1becauseithast hehi ghestpr ofi
    tabi
    li
    tyindex.
    appr opri
    ate di
    scountr at
    ei s12% pery ear. Whi ch machine should OM b.Pr oposal 4becauseithast hel owestpr ofit
    abil
    it
    yindex.
    Const ruct
    ionpur chase? c. Proposal s2and3becauset heirtot alnetpresentv al
    uesaret hehi
    ghest
    A.Cr aneAasEACi s$226,444 amongal lpossi
    bleproposal combi nations.
    B.Cr aneBasEACi s$194,336 d.Pr oposal s1and2becauset heirtot alnetpresentv al
    uesaret hehi
    ghest
    C.Cr aneAast hePVi s$816, 286 amongal lpossi
    bleproposal combi nations. RPCPA0579
    D.Cannotbecal cul
    atedast herevenuesforthepr oj
    ectarenotgi v
    en B&M
    cxxi
    x
    36.Thef ol
    lowi
    ngtabl
    egiv
    estheavai
    labl
    epr oj
    ectsforafir
    m.
    . Bor denBooksi si nterest edinpur chasingacomput ersy stem tousef or A B C D E F G
    thenext10y ears.Cur rently,Bordeni sconsi der i
    ngt womut uallyexclusive
    90 20 60 50 150 40 20 I nit
    ial
    systems, System SandSy stem L.
    i
    nvestment
    System Shasanup- frontcostof$3mi l
    li
    onatt=0andwi l
    lproduceposi tive
    140 70 65 -
    10 30 32 10 NPV
    cashf lowsof$2. 5mi lli
    onpery earf ort woy ears( att=1and2) .Thi
    ssy stem
    canber epeatedf or ever.I notherwor ds,ev er
    yt woy earst hecompanycan I
    fthef i
    rm hasali
    mitof200mill
    i
    ont oinvest
    ,whati sthemaximum NPVthe
    repurchaset hesy st em underexact l
    yt hesamet er ms. companycanobtain?(
    M)
    System Lhasanup- frontcostof$5mi l
    li
    onatt=0andwi l
    lproduceposi tive A.200 C.283
    cashf lowsof$2mi l
    li
    onpery earf orf i
    vey ears( att=1,2,3,4,and5) .Thi s B.243 D.Noneoft heabove B&M
    system canber epl acedatacostof$4mi ll
    ionatt=5, aft
    erwhi chti
    mei twi l
    l
    produceposi t
    ivecashf lowsof$1. 5mi ll
    i
    onpery earfort hesubsequentf ive 37.Thef ol
    lowi
    ngtabl
    egivestheavai
    l
    ableproj
    ectsf
    orafi
    rm.
    years( att=6, 7,8, 9, and10) . A B C D E F G
    Borden’ sCFOhasdet ermi nedt hatthecompany ’sWACCi s12per cent.Overa 5.0 4. 0 5.0 1.
    0 2.
    0 7.0 8.
    0 I nit
    ial
    10-yearext endedbasi s,whi chsy stem i sthebet tersy st
    em andwhati sits i
    nvest
    ment
    NPV?( M) 1.5 - 0.
    5 1.0 0.
    5 0.
    5 1.0 1.
    0 NPV
    a.Sy stem L; $2.21mi ll
    ion d.Sy st
    em L; $4.41mi l
    li
    on Thef ir
    m hasonlytwent
    ymi l
    li
    ontoinvest
    .Whatist hemaximum NPVthat
    b.Sy stem L; $3.01mi ll
    ion e. Sy st
    em S; $6. 13mi ll
    i
    on thecompanycanobt ai
    n?(M)
    c. Sy stem S; $4.10mi ll
    ion Bri
    gham A.3. 5 C.4. 0
    B.4. 5 D.Noneoft heabove B&M
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page55of55
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Outlay
    Pr
    ofit
    abil
    it
    yIndex 1 1.25 P400, 000
    *.Informationont hree(E)i
    nvest
    mentpr oj
    ectsi
    sgivenbel ow: 2 1.19 100,000
    Project I
    nvest
    mentRequired NetPresentVal
    ue 3 1.16 175,000
    X P150,
    000 P34,005 4 1.14 125,000
    G 100,
    000 22,
    670 5 1.09 200,000
    W 60,
    000 13,
    602 6 1.05 100,000
    Rankthepr oject
    sintermsofpref
    erence:(M) 7 0.97 150,000
    a.1stW; 2ndG; 3r
    dX. c. 1stX;2ndG; 3rdW. Ifthe budgetceili
    ng fori ni
    tialoutlays during the pr esentper i
    od was
    b.1stG; 2ndW; 3rdX. d.Ther ankingisthesame.
    RPCPA P1,000,
    000andt heproposalswer eindependentofeachot her,t
    heCompany
    1097 shouldengageinproposal(
    s)(E)
    a.Pr oposal1to6becauset heirprofi
    tabil
    it
    yindecesar eal lgr
    eaterthan1.
    69.PerkinsCompanyi sconsi
    deri
    ngsev erali nvest
    mentpr oposals,asshown b.Pr oposal7becauseitsprofi
    tabil
    it
    yindexi sl
    esst han1.
    bel
    ow: c. Proposal1to5becauset heirprofi
    tabil
    it
    yindecesar egr eater
    .RPCPA
    I
    nvestmentProposal 0579
    A B C D d.Pr oposal
    s1,3,4,5and6becauset hei
    rprofit
    abili
    tyi ndecesaregr eat
    er
    Inv estmentrequi
    red $80, 000$100, 00 $60,000$75,000 than1.
    0
    Pr esentvalueoffut
    urenetcash 96, 000 150, 000 84,000 120,000 Questi
    ons26and27arebasedonthef ol
    lowi
    ngi nf
    ormation.CI A1196IV-40&41
    flows I
    nvest
    mentProj
    ect CashOut lay PresentValueofCashI nfl
    ows
    Rankt hepr oposalsi
    ntermsofpref
    erenceusi ngtheprofit
    abili
    tyi
    ndex:(E) A $1,
    100,
    000 $980, 000
    a.D, B, C,A. c. B, D,A,C. B 250,000 600,000
    b.B, D, C,A. d.A, C,B,D. G&N9e C 1,
    400,000 1,830,000
    D 650,000 790,000
    70.I
    nformati
    ononf ouri
    nvest
    mentproposal si
    sgivenbelow: Thecompanyhas$2mill
    ionoffi
    nancingavai
    lablefornewi nvestmentproj
    ect
    s.
    Proposal I
    nv estment NetPr esentValue
    1 $50,000 $30,000 cxxx. Theinvest
    mentpr
    ojectwi
    tht
    hehi
    ghestprofit
    abi
    l
    ityi
    ndexi
    s
    2 60,000 24,000 A.Pr oj
    ectA. C.Pr ojectC.
    3 30,000 15,000 B.Pr oj
    ectB. D.Pr ojectD.
    4 45,000 9,000
    Rankthepr oposalsi
    ntermsofpr
    ef erenceaccordingtot
    hepr ofi
    tabil
    i
    tyi
    ndex: cxxxi
    .Ifonlyonepr
    ojectmaybesel
    ect
    ed,
    whi
    chshouldthecompanyunder
    take?
    (E) A.ProjectA. C.Proj
    ectC.
    a.3, 4,
    1, 2. c. 1,3,2,4. B.ProjectB. D.Proj
    ectD.
    b.1, 2,
    3, 4. d.2, 1,4,3. G&N9e
    NetPresentVal
    ue&I
    nter
    nalRat
    eofReturn
    *. TheSar
    mient
    oCompanyhasthefol
    lowi
    ngi
    nvest
    mentopport
    uni
    ti
    es: Quest
    ions20&21arebasedonthefol
    lowi
    nginfor
    mation. Gi
    tman
    Pr
    oposal Pr
    ofi
    tabi
    l
    ityI
    ndex I
    nit
    ial
    Cash Afir
    m mustchoosefrom si
    xcapi
    talbudget
    ingproposal
    sout
    li
    nedbel
    ow.The
    CMAEXAMI NATIONQUESTI
    ONS Page56of56
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    f
    ir
    mi ssubjecttocapi
    talrationi
    ngandhasacapitalbudgetof$1,000,000;t
    he Restr
    ict
    ion Funds Funds
    f
    ir
    m'scostofcapit
    ali
    s15per cent. a. Projects2,
    3,&4 Projects3&4 Pr oj
    ect3
    Project Ini
    ti
    al Invest
    ment IRR NPV b. Project
    s1, 2,
    &3 Projects2,3&4 Pr
    ojects3&4
    1 $200,000 19% $100,000 c. Project
    s1, 3,
    &4 Projects2&3 Pr oj
    ect2
    2 400,000 17 20,000 d. Projects3&4 Projects2&4 Pr
    ojects2&4
    3 250,000 16 60,000
    4 200,000 12 5,
    000 Questi
    ons63t hrough65ar ebasedont hefol
    lowinginformation.
    5 150,000 20 50,000 Glei
    m
    6 400,000 15 150,000 MaloneyCompanyusesa12% hur dlerat
    eforal lcapit
    alexpendi t
    uresandhas
    donethef oll
    owinganal ysi
    sforfourproj
    ect
    sfortheupcomi ngy ear
    :
    20.Usingtheinternalr
    ateofr
    etur
    nappr
    oachtorankingpr
    oject
    s,whi
    chpr
    oject
    s Proj
    ect1 Pr oject2 Pr oj
    ect3 Pr oj
    ect4
    shouldthefir
    m accept? I
    niti
    al outl
    ay $4,960,
    000 $5,440,000 $4, 000,000 $5,960,
    000
    A.1, 2,3,4,and5 C.2,3,4,and6 Annual net cash
    B.1, 2,3,and5 D.1,3,4,and6 i
    nflows
    Year1 1,600,
    000 1, 900,000 1, 300,000 2, 000,
    000
    21.Usingthenetpr esentval
    ueappr
    oachtoranki
    ngproj
    ect
    s,whi
    chpr
    oject
    s Year2 1,900,
    000 2, 500,000 1, 400,000 2, 700,
    000
    shoul
    dthef i
    rm accept
    ? Year3 1,800,
    000 1, 500,000 1, 600,000 1, 800,
    000
    A.1, 2,3,
    4,and5 C.2,
    3, 4,
    and5 Year4 1,600,
    000 1, 200,000 800,000 1, 300,
    000
    B.1, 2,3,
    5,and6 D.1,
    3, 5,
    and6 Netpr esentv al
    ue 281,
    280 293,240 (
    75,960) 85,
    520
    Profi
    tabili
    tyindex 106% 105% 98% 101%
    Compr ehensi ve I
    nternal r
    ateofr et
    urn 14% 15% 11% 13%
    45.Inv
    est ors,I nc.usesa12% hur dler at
    ef oral lcapit
    alexpendituresandhas
    donet hef ollowinganalysisforfourpr ojectsfortheupcomi ngy ear: cxxxi
    i.Whatpr oj
    ect(s)shoul
    d Maloneyundertakedur
    ing t
    heupcomi
    ng y
    ear
    Project1 Pr oject2 Pr oject3 Pr oj
    ect4 assumingi thasnobudgetrest
    ri
    ctions?
    I
    niti
    al cashout l
    ay P200,000 P298, 000 P248, 000 P272, 000 a.All oftheproj
    ect s. c. Pr
    oject
    s1,
    2and4
    Annual net cash b.Pr ojects1,2,and3 d.Project
    s1and2
    i
    nflows
    Year1 P 65,000 P100, 000 P 80, 000 P 95, 000 cxxxi
    ii
    .Whi
    chproj
    ect
    sshouldMaloneyunder
    takeduri
    ngtheupcomi
    ngy
    eari
    fit
    Year2 70,000 135, 000 95,000 125, 000 hasonl
    y$12,
    000,
    000ofi
    nvest
    mentfundsavail
    abl
    e?
    Year3 80,000 90,000 90,000 90,
    000 a.Proj
    ects1and3 c. Proj
    ect
    s1and4.
    Year4 40,000 65,000 80,000 60,
    000 b.Proj
    ects1,
    2,and4. d.Pr oj
    ect
    s1and2.
    Netpr esentv al
    ue (3,798) 4,276 14,064 14,
    662
    Profi
    tabi l
    it
    yindex 98% 101% 106% 105% cxxxi
    v.Whi
    chpr oj
    ect(s)shoul
    dMaloneyundertakeduri
    ngt
    heupcomi
    ngy
    eari
    fit
    I
    nternal rateofreturn 11% 13% 14% 15% hasonl
    y$6,000,000offundsav
    ailabl
    e?
    Whi chpr oject(s)shouldInvestors,Inc.selectdur i
    ngtheupcomi ngy earunder a.Proj
    ect3. c. Proj
    ect1.
    eachbudget edamountoff unds? PolBobadil
    la b.Proj
    ects1and2. d.Pr oj
    ect2.
    NoBudget P600,000Av ai
    lable P300,000Av ail
    abl
    e
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page57of57
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Questi
    ons60t hrough62ar ebasedont hefol
    lowinginformati
    on. CMA 695 4-7 t
    ogener
    atecashinfl
    owsof$700,
    000attheendofthefi
    rstyearand$500,
    000at
    to9 t
    heendofthesecondyear
    .Thecompanyhasacostofcapit
    alof8%.
    Capit
    alInv estInc.usesa12% hur dl
    er at
    eforal lcapit
    alexpendit
    uresandhas
    donethef oll
    owinganal ysi
    sforf
    ourprojectsf
    ortheupcomi ngy ear
    : cxxxv
    iii
    . Whati
    sthenetpr
    esentvalue( NPV)ofeachprojectwhent hecost
    Project1 Pr oject2 Pr oj
    ect3 Pr oj
    ect4 ofcapi
    tal
    iszero?
    I
    niti
    alcapital out
    lay $200,000 $298, 000 $248,000 $272,000 CIA0594I V- A. B. C. D.
    Annual netcashi nfl
    ows 40
    Year1 $65,000 $100, 000 $80, 000 $95, 000 Proj
    ectA $30,
    000 $50,000 $80,000 $110,000
    Year2 70,000 135, 000 95,
    000 125, 000 Proj
    ectB $1,
    000,
    000 $200, 000 $1,
    200,000 $2,200,000
    Year3 80,000 90,000 90,
    000 90,
    000
    Year4 40,000 65,000 80,
    000 60,
    000 cxxxi
    x.Theint
    ernalr
    ateofr
    etur
    nofPr
    ojectA,t
    othenear
    estf
    ullper
    centage
    Netpresentv al
    ue (
    3,798) 4,276 14,
    064 14,
    662 poi
    nt,i
    s
    Profi
    tabili
    tyindex 98% 101% 106% 105% A.10% C.25%
    I
    nternal r
    ateofr etur
    n 11% 13% 14% 15% B.15% D.100% CIA0594IV-41

    cxxxv.Which project
    (s) shoul
    d Capi
    talInvest I
    nc.undert
    ake dur
    ing t
    he cxl
    .Netpresentv alue(NPV)andinternalrateofret urn(I
    RR)diff
    erint hat
    upcomingyearassumi ngi
    thasnobudgetr
    estr
    ict
    ions? A.NPVassumesr ei
    nvest
    mentofpr ojectcashf l
    owsatt hecostofcapi tal
    ,
    A.Alloftheprojects. C.Pr oj
    ect
    s2, 3,
    and4. wher easIRRassumesr ei
    nvestmentofpr ojectcashfl
    owsatt heinter
    nal
    B.Projects1,2,and3. D.Pr oj
    ect
    s1, 3,
    and4. rateofr et
    urn. CIA0594I V-42
    B.NPVandI RRmakedi f
    fer
    entacceptorr ejectdecisi
    onsf orindependent
    cxxxvi
    .Whi
    ch project(
    s) shoul
    d Capi
    talInv
    est I
    nc.under
    take dur
    ing t
    he projects.
    upcomi
    ngyearifithasonl
    y$600,
    000off
    undsavai
    labl
    e? C.I RRcanbeusedt orankmut uall
    yexcl usi
    vei nvestmentprojects,buttNPV
    A.Proj
    ect
    s1and3. C.Proj
    ect
    s2and3. cannot .
    B.Proj
    ect
    s2, 3,and4. D.Proj
    ect
    s3and4. D.NPVi sexpr essedasaper centage,whileI RRisexpressedasadol l
    ar
    amount .
    cxxxvi
    i
    .Whi
    ch project(
    s) shoul
    d Capi
    talInvest I nc.undertake dur
    ing t
    he
    upcomi
    ngyearifithasonl
    y$300,
    000ofcapitalfundsavai
    lable? cxl
    i
    . I fProj
    ects A and B ar
    e mutuall
    y exclusive,whi
    ch oft
    he f
    oll
    owi
    ng
    A.Proj
    ect1. C.Pr ojects3and4. st
    atement
    sistr
    ue?
    B.Proj
    ects2,3,and4. D.Pr oject3. A.Thecompanyshouldundert
    akeProj
    ectAonl y.
    B.Thecompanyshouldundert
    akeProj
    ectBonl y
    .
    Quest ions73thru78ar ebasedont hefollowinginfor
    mat ion. C.Thecompanyshouldundert
    akebothprojects.
    A company t hatannual l
    yr eviews i
    tsi nvestmentoppor tuniti
    es and selects D.Thecompanyshouldnotunder
    takeeit
    herpr oject
    . CI
    A0594IV-
    43
    appr opriat
    ecapitalexpendi t
    uresfort hecomi ng y eari spr esented wit
    ht wo
    projects,call
    ed Pr oj
    ectA and Pr ojectB.Bestest imat es indicat
    et hatt he cxl
    i
    i. IfPr
    oject
    sAandBar ei
    ndependent
    ,whi
    chofthef
    oll
    owi
    ngst
    atement
    sis
    i
    nv estmentout l
    ayf orProjectAi s$30,000andf orPr oj
    ectBi s$1mi l
    li
    on.The tr
    ue?
    projectsar econsider
    edt obeequal lyr i
    sky.ProjectAi sexpect edtogener ate A.Thecompanyshoul
    dundert
    akeProj
    ectAonl
    y.
    cashi nflowsof$40,000att heendofeachy earfor2y ears.ProjectBisexpect ed B.Thecompanyshoul
    dundert
    akeProj
    ectBonl
    y.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page58of58
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    C.Thecompanyshoul
    dundert
    akebothproj
    ect
    s. cxl
    i
    v . Whati st
    heexpectedvalueofNPV( t
    othenearestdol
    l
    ar)fort
    hef ol
    l
    owing
    D.Thecompanyshoul
    dnotunder
    takeei
    therpr
    oject
    . CI
    A0594I
    V-44 si
    tuati
    on? The fir
    m expect s an NPV of $10, 000 i
    ft he economy i s
    excepti
    onall
    ystr
    ong( 40% probabil
    it
    y),anNPVof$4, 000iftheeconomyi s
    cxl
    i
    ii.Ift
    henetpr esentv al
    ue(NPV)ofpr oj
    ectAi sknownt obehi ghert hant he normal( 40% probabil
    i
    ty)
    ,and an NPV of- $2,000 i
    ft he economy i s
    NPVofpr ojectB, i
    tcanbeconcl udedt hat excepti
    onall
    yweak(20%pr obabil
    it
    y).(M)
    A.Thei nternalrat eofreturn(I
    RR)ofpr ojectAwi lldef
    ini
    telybehi ghert han A.$5, 600 C.$6,000
    theIRRofpr ojectB. B.$5, 200 D.Noneoft heanswersarecorrect
    .
    B.TheIRRofpr ojectAwi l
    ldefi
    nitel
    ybelowert hant heI
    RRofpr ojectB. Gleim
    C.Ther ankingofI RRsisindet
    ermi nat
    ebasedont heinf
    ormat i
    onpr ov i
    ded.
    D.Thepay backper iodforprojectAi sdef i
    nit
    elyshorterthanthepay back Questions5t hru7ar ebasedont hef ol
    lowinginf
    ormat i
    on. Gitman
    peri
    odf orprojectB. CI
    A1190I V-54 A corpor ati
    oni sassessi ngt
    her i
    skoft wocapi talbudgeti
    ngpr oposals. The
    fi
    nancialanal yst
    s hav e developed pessi mi
    sti
    c,mostl i
    kely,and opt imist
    ic
    PROJECTI MPLEMENTATI ON&REVI EW esti
    mat esoft heannualcashinf l
    owswhi charegiveninthef oll
    owi
    ngt able.The
    Questions28and29ar ebasedonthef oll
    owinginf
    ormation. RPCPA0593 fi
    rm'scostofcapi tali
    s10percent .
    Theconst r
    uctionofawast etreat
    mentpl antwasar r
    ivedatafteracar
    efulcost- ProjectA ProjectB
    benefi
    tanalysis.Dur i
    ngtheconstructionperi
    odast atusreportwaspresent
    ed Initi
    al Annual Ini
    tial Annual
    foryourrevi
    ew: Invest ment Cash Outcome I nv
    estment Cash Out come
     compl etedcostasori
    ginal
    l
    yest imated,
    P5mi l
    li
    on inf
    low I
    nflow
     %ofact ual
    completi
    ontodate, 65% $20, 000 $5, 000 Pessi mistic $100,000 $20, 000 Pessi mist
    ic
     act ualcosttodate,P3.
    75mi l
    lion 10,000 Mostl ikely 40,000 Mostl i
    kel
    y
    15,000 Opt imisti
    c 100,000 Opt imisti
    c
    *
    . Assumingcostisev enlydi
    stributedthroughouttheconst
    ruct
    ionper
    iod,how
    muchwi l
    lthecompl et
    ioncostbemostl ikel
    y?(E) 5.Ther
    angeoftheannual
    cashi
    nfl
    owsf
    orPr
    ojectAi
    s(E)
    a.Theor i
    ginalcostestimateofP5mi ll
    ion. A.$30,
    000. C.$5,
    000.
    b.P5mi ll
    ionplusacostov errunofaboutP769, 000 B.$10,
    000. D.$0.
    c. P500,
    000lesst hantheoriginalcostatcompleti
    on.
    d.AboutP100, 000abov etheor i
    ginalcostatcomplet
    ion. 6.I
    fthepr oj
    ect
    shavefi
    veyearl
    i
    ves,t
    herangeofthenetpr
    esentv
    aluef
    or
    Pr
    ojectBisappr
    oxi
    mat
    ely(
    M)
    *
    . Whatwoul dbeanappr opriateacti
    ont ot akeconsideri
    ngthesit
    uationi
    n A.$80,560. C.$255,
    410.
    number28? B.$201,000. D.$303,
    280.
    a.Noneedt otakeanyaction.
    b.Immedi at
    elystopfur
    therwor konthepr oject. 7.Theexpectednetpresentval
    ueofproj
    ectA ift
    heout
    comesar
    eequal
    l
    y
    c. Recommendi mmediater ev
    iew wi
    ththepr oj
    ectimpl
    ementat
    ionteam t
    o probabl
    eandthepr
    ojecthasfi
    vey
    earl
    i
    feis(
    M)
    deter
    minethecauseofov er
    runandthecor recti
    veact
    ionst
    obetaken. A. $1,045. C.$36,865.
    d.Wai tfort
    henextquarterlystat
    usreportont heproj
    ect
    . B.$17,910. D.$93,730.

    PROBABI
    LITI
    ES&EXPECTEDVALUEANALYSI
    S Quest
    ions8t
    hru12ar
    ebasedont
    hef
    oll
    owi
    ngi
    nfor
    mat
    ion. Gi
    tman

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page59of59
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Afi
    rmisev al
    uati
    ngtherelat
    iver
    iskinessoft wocapitalbudgeti
    ngpr oj
    ects.The TheSuar ezCorpor at
    ionhast hefollowingi ncrement alcashf l
    owsf orapr ess
    f
    oll
    owi
    ngt abl
    esummar i
    z esthenetpr esentval
    uesandassoci atedprobabil
    i
    ties machi neiti
    ntendst obuy :
    f
    orvar
    iousoutcomesforthetwopr ojects. Year1 Year2
    NetPresentValue CashFl ow I nit
    ialPr obabil
    it
    y CashFl ow Ini
    tial
    Probabil
    i
    ty ProjectA Pr oj
    ectB Probabi l
    it
    y
    0.
    25 $5, 000 0 P5,000 0.5 P 3, 000 0.3
    0.
    50 4,000 $2, 000 4,500 0.3
    0.
    25 10,000 8,000 6,000 0.4
    P10,000 0.5 P10, 000 0.
    25
    8.Theexpect
    ednetpr
    esentval
    ueforpr
    oject
    sAandBare 12,500 0.
    40
    A.$4,000and$1,
    500,r
    especti
    vel
    y. C.$3,250and$3,
    000,
    respect
    ivel
    y. 15,000 0.
    35
    B.$2,000and$1,
    000,r
    especti
    vel
    y. D.$3,000and$3,
    300,
    respect
    ivel
    y. Thef i
    rm hasar equir
    edaf tert
    axr ateofr etur nof10%.Theabandonmentv alue
    oft
    hemachi neisasf ollows:
    9.Thest
    andarddevi
    ati
    onforpr
    oject
    sAandBar
    e Year1 Year2
    A.$3,000and$5,
    000,r
    especti
    vel
    y. C.$2,
    106and$0,
    respectiv
    ely
    . Probabil
    i
    ty Amount Probabi l
    it
    y Amount
    B.$4,210and$2,
    104,r
    especti
    vel
    y. D.$5,
    356and$3,
    000,respect
    ivel
    y. 0.5 P8, 000 0.5 P2, 000
    0.3 5,000 0.3 1,
    500
    10.Thecoef
    fi
    cientofvar
    iati
    onsf
    orpr
    oject
    sAandBar
    e 0.2 4,000 0.2 1,
    000
    A.0.6and1, r
    espect
    ivel
    y. C.0.
    8and2,r
    espectiv
    ely. *. Basedont heabov edat a,whati sthejoi ntpr obabil
    it
    yoft hecashf lowser i
    es
    B.1.6and1, r
    espect
    ivel
    y. D.1.
    2and1.
    5,respecti
    vel
    y. thatwi l
    lyi
    eldP10,000f orthefirstyearandP12, 500forthesecondy ear
    ?(D)
    a.0. 125 c. 0. 175
    11.Thet wopr ojectscanbestbechar acter
    izedr
    elati
    vet ooneanotherbythe b.0. 150 d.0. 200
    st
    atement ,
    A.pr oj
    ectAi smor eriskyt
    hanproj
    ectB. *
    . Theabandonmentv
    aluef
    ory
    ear1i
    s(D)
    B.pr oj
    ectBi smor eriskyt
    hanproj
    ectA. a.P5,000 c. P7,
    500
    C.sincepr ojectA hasahi gherexpect
    ednetpr esentvalue,i
    tshouldbe b.P6,300 d.P10,000
    chosen.
    D.sincepr ojectB hasahi gherstandarddeviat
    ion,iti
    smor eriskyand *
    . Theabandonmentv
    aluef
    ory
    ear2i
    s(D)
    shouldnotbechosen. a.P1,650 c. P25,
    500
    b.P13,500 d.P37,500
    12.Thef
    ir
    m should
    A.chooseproj
    ectAsi
    ncei
    thasahi
    ghernetpresentval
    uepot
    ent
    ial
    . COMPREHENSI VE
    B.chooseproj
    ectBsi
    ncei
    thasal
    owerstandarddevi
    ati
    on. CashFlows&DiscountedCashFl ows
    C.chooseproj
    ectAsi
    ncei
    thasal
    owerrelat
    iveri
    sk. Questi
    ons91through94ar ebasedonthefoll
    owingi
    nformation. CMA 1296 4-
    D.chooseproj
    ectBsi
    ncei
    thasal
    owerrel
    ativeri
    sk. 15to18
    I
    n ordertoincrease product
    ion capaci
    ty,Gunni
    ng Industri
    es is consi
    der
    ing
    Quest
    ions23t
    hrough25ar
    ebasedont
    hef
    oll
    owi
    ngi
    nfor
    mat
    ion. RPCPA0579 repl
    aci
    nganexi st
    ingproducti
    onmachi newithanew t echnologi
    cal
    lyimproved
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page60of60
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    machi ne ef fect
    ive Januar y 1,1997. The f oll
    owi ng i nformation is bei ng
    consideredbyGunni ngI ndust r
    ies: cxl
    vii
    i.Theov er
    alldi
    scountedcashfl
    ow impactofGunningIndust
    ri
    es’wor
    king
     Thenew machi newoul d bepur chased f or$160, 000 i ncash. Shi pping, capi
    talinvestmentforthenewproduct
    ionmachinewouldbe
    i
    nst allat
    ion,andt estingwoul dcostanaddi t
    ional $30,000. a.$( 7,
    959) c. $(13,
    265)
     Thenew machi nei sexpect edt oi ncreaseanannualsal esby$20, 000ata b.$( 10,080) d.$( 35,
    000)
    salespr iceof$40peruni t
    .I ncrement aloper at
    ingcost sinclude$30peruni t
    i
    nv ari
    ablecost sandt ot alfi
    xedcost sof$40, 000pery ear. NetInvestment&Pay backPeri
    od
     Thei nvestmenti nt henew machi newi llrequireani mmedi at
    ei ncreasei n Questions19and20ar ebasedont hef
    oll
    owinginf
    ormation. RPCPA0583
    wor kingcapi t
    alof$35, 000.Thi scashout fl
    owwi llber ecov er
    edatt heendof BetaCompanypl anstorepl
    aceitscompanycarwi thanew one.Thenew car
    year5. costsP120, 000anditsesti
    matedusefulli
    feisfiv
    ey earswit
    houtscrapvalue.
     Gunni ng uses st raight -l
    i
    ne depr eciati
    on f orf inancialr eporti
    ng and t ax Theol dcarhasabookv alueofP15,000andcanbesol datP12,000. The
    repor ti
    ngpur poses.Thenewmachi nehasanest i
    mat edusef ulli
    feof5y ears acquisit
    ionoft henew carwi l
    lyi
    eldannualcashsav ingsofP20,000before
    andzer osalvagev alue. i
    ncomet ax.Incometaxrat
    eis25%.
     Gunni ngi ssubjectt oa40%cor porateincomet axr ate. *. Theneti nvest
    mentofthenewcaris(E)
    Gunningusest henetpr esentv al
    uemet hodt oanal y
    zei nvestmentsandwi l
    l a.P108, 000 c. P107,
    250
    employt hef oll
    owingf actor sandr ates: b.P108, 750 d.P107,000
    Pr esentVal ue Pr
    esentVal ueofan
    Per iod of$1at10% OrdinaryAnnui tyof$1at10% *
    . Thepaybackper
    iodoft
    hei
    nvest
    menti
    s(M)
    1 0.909 0.909 a.5.14years c. 5.
    11years
    2 0.826 1.736 b.5.18years d.5.095years
    3 0.751 2.487
    4 0.683 3.170 Payback&NetPr esentValue
    5 0.621 3.791 Questions1&2ar ebasedont hefol
    lowinginf
    ormati
    on. H&M
    RandallCorpisconsi deri
    ngt hepurchaseofanew machi nef or$38,
    000.The
    cxl
    v. Gunni
    ngIndust
    ri
    es’
    netcashout
    fl
    owinacapit
    albudget
    ingdeci
    sioni
    s machinewoul dgener ateanetcashi nfl
    owof$11,607peryearforfi
    veyears.At
    a.$190,
    000 c. P204,
    525 theendoff iv
    ey ears,themachinewoul dhavenosalvagevalue.Thecompany’s
    b.P195,
    000 d.P225,000 costofcapi tali s 12 percent
    .The company uses st r
    aight-
    li
    ne method of
    depreciat
    ionwit
    hnomi d-y
    earconvention.
    cxl
    vi. Gunni
    ngIndust
    ri
    es’
    discount
    edannualdepr
    eci
    ati
    ont
    axshi
    eldf
    ort
    hey
    ear cxl
    i
    x
    1997is .
    Whatisthepaybackperi
    odi
    ny ear
    sf orthemachi
    neappr
    oxi
    mat
    edt
    otwo
    a.$13,817 c. $20,
    725 deci
    malpoi
    nts,
    assumingnot
    axesarepaid?
    b.$16,762 d.$22,800 a.3.00 c. 3.27
    b.9.48 d.4. 00
    cxl
    vii
    .Theacqui
    sit
    ionofthenewproduct
    ionmachinebyGunni
    ngI
    ndust
    ri
    eswi
    l
    l cl
    cont
    ri
    but
    eadiscount
    ednet-
    of-
    taxcont
    ribut
    ionmargi
    nof . Whati
    sthenetpr
    esentv
    aluef
    ort
    hemachi
    ne,assumi ngnot
    axesar
    epai
    d?
    a.$242,
    624 c. $363,
    936 a.$3,
    843 c. $38,000
    b.$303,
    280 d.$454,920 b.$0 d.$( 92,750)

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page61of61
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Questions1and2ar ebasedont hefol


    lowi nginformat
    ion. H&M c. $29,
    896 H&M
    JD,Inc.isconsider
    ingthepurchaseofpr oductionequipmentthatcost
    s$400,
    000.
    Theequi pmenti sexpectedt ogenerateannualcashi nfl
    owsof$125, 000and Quest ions79and80ar ebasedont hef ol
    lowi
    ngi nformation. PolBobadill
    a
    haveausef ull
    i
    feof5y earswit
    hnosal vagev alue.Thefi
    rm’scostofcapit
    ali
    s12 RiskI nsuranceCompany ’
    smanagementi sconsi deri
    nganadv ert
    isingprogram
    percent.Thecompanyusest hestr
    aight-
    linemet hodofdepreciat
    ionwithnomid- thatwoul dr
    equireani nit
    ialexpendit
    ureofP165, 500andbr i
    nginaddi ti
    onalsales
    yearconv enti
    on.Therearenoincomet axes. ov erthenextf i
    vey ear s.Thecostofadv er
    ti
    singi simmedi atelyrecognizedas
    expense. Thepr ojectedaddi ti
    onalsalesrev enuei nYear1i sP75, 000,with
    cl
    i
    .Thepaybackper
    iodi
    nyear
    sfort
    hepr
    ojecti
    s associ atedexpensesofP25, 000. Theaddi t
    ionalsal esrevenueandexpenses
    a.2.90years c. 3.25y
    ear
    s from theadv ert
    isingpr ogram areprojectedtoi ncreaseby10%eachy ear.Risk
    b.3.20years d.4. 20y
    ear
    s InsuranceCompany ’staxr ateis40%.
    Thepr esentv al
    ueof1at10%, endofeachper iod:
    cl
    i
    i
    .Ignor
    ingincomet
    axes,
    thenetpr
    esentval
    ueofthepr
    ojecti
    s Periods PresentValueFact or
    a.$40, 480 c. $50,
    625 1 0.
    90909
    b.$48, 625 d.$54,450 2 0.
    82645
    3 0.
    75131
    Questions1&2ar ebasedont hefol
    lowingi
    nformati
    on. 4 0.
    68301
    Rogers Manuf act
    uri
    ng Company i s consideri
    ng the fol
    l
    owing investment 5 0.
    62092
    proposal:
    Origi
    nal i
    nv estment $30,
    000 79.Thepay
    backper
    iodf
    ort
    headv
    ert
    isi
    ngpr
    ogr
    am i
    s
    Oper ati
    ons( peryearfor4years)
    : A.4.6year
    s. C.3.
    9years
    Cashr eceipts $20,
    000 B.3.0year
    s D.2.
    5years
    Cashexpendi tures 11,
    000
    Salvagev alueofequi pmentafter4 $ 2,000 80.Thenetpresentv
    alueoft
    headv
    ert
    isi
    ngprogram woul
    dbe
    years A.P37,064 C.P(37,
    064)
    Discountr ate 10percent B.P29,136 D.P(29,
    136)
    The firm uses t he str
    aight
    -l
    ine method ofdepr eci
    ati
    on wi
    th no mi d-
    year
    convention. NetIncomeaf terTax,AnnualCashFlow&Pay backPeri
    od
    Questions15t hrough17ar ebasedonthef oll
    owinginf
    ormati
    on. RPCPA1083
    cl
    i
    ii
    .Whatist hepaybackper
    iodi
    nyear
    sappr oxi
    mat
    edt
    otwodeci
    malpoi
    nts Plari
    delElectronicsisconsider
    ingthefeasibi
    lit
    yofproduci
    nganew pr oductt
    o
    assumingnotaxesar
    epai
    d? addt oit
    sexi sti
    ngline.Thesalesandcostest imatesf
    orthi
    snewproductareas
    a.3.33 d.3.78 foll
    ows:
    b.1.50 e. 4.
    00 Annual sales 22,
    500
    c. 1.
    70 H&M unit
    s
    cl
    i
    v
    Selli
    ngpr i
    ce P35per
    .Whati
    sthenetpr
    esentv
    aluef
    ort
    hei
    nvest
    ment ,assumi
    ngnot
    axesar
    epai
    d? unit
    a.$(1,
    000) d.$29, 000 Variabl
    emanuf actur
    ingcosts P21per
    b.$30,
    000 e. $(104) unit

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page62of62
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Increment al fi
    xedmanuf acturi
    ngcost s(depreci
    ati
    on P37,
    500
    notincluded) Questi
    ons1&2ar ebasedont hefoll
    owi nginformation.
    Increment al sel
    li
    ngandadmi nist
    rati
    veexpenses P45,
    000 HancockCor porationisconsi der
    ingani nvestmenti nequi pmentfor$30,000.
    To pr oduce t he new pr oduct ,the company mustpur chase an addit
    ional Datarel
    atedtothei nvest mentareasf oll
    ows:
    equipmentcost ingP300, 000.Si ncet heproductwi l
    lhaveal if
    ecy cl
    eofonlyfiv
    e Year I
    ncomeBef or
    eDepr eci
    ati
    onandTaxes
    years,theequi pmentwi llalsohav easer vi
    cel i
    feof5y earswithnosal v
    agevalue. 1 $20, 000
    Thest rai
    ght-l
    inemet hodofdepr eci
    ationisused.Cashbasi sforallr
    evenuesand 2 20,000
    expensesot hert handepr eciati
    oni sassumed.Appl i
    cableincomet axratei
    s35% 3 20,000
    *. Theest imat edannualneti ncomeaf tertaxesf r
    om thepr oposaltoproduce 4 20,000
    thenewpr oducti s(E) 5 20,000
    a.P86, 250 c. P151,125 Costofcapit
    alis18per cent.
    b.P112, 125 d.P172, 500 Hancock uses t he st raight
    -l
    ine met hod ofdepr eciati
    on wit
    h no mid-year
    convent
    ion.I
    naddi t i
    on,theirtaxrateis40per centandt heli
    feoftheequi
    pment
    *
    . Theest
    imatednetannual
    cashf
    lowexpect
    edfrom thesamepr
    oposal
    is(
    E) i
    sf i
    veyearswithnosal v agevalue.
    a.P112,125 c. P249,625
    b.P172,125 d.P232, 500 cl
    v
    .Whatist
    hepay
    backper
    iodi
    nyear
    sappr
    oximat
    edt
    otwodeci
    mal
    poi
    nts?
    a.1.00 d.1.50
    *
    . Thepaybackper
    iodoft
    hissamepr
    oposali
    s(E) b.0.67 e. 2.
    08
    a.1.74years c. 3.
    48year
    s c. 0.
    48 H&M
    b.2.68years d.5y ear
    s
    cl
    vi
    .Whatist henetpr
    esentv
    alueoft
    hei
    nvest
    ment?
    Payback&NPV a.$45, 029 d.$7,524
    Questions79and80ar ebasedont hefollowinginformati
    on. Bar f
    iel
    d b.$( 15,029) e. $15,
    029
    BluesBr os.Inc.isconsider
    ingani nv
    est menti nacomput ert hatiscapabl eof c. $32,540 H&M
    producingv ari
    ousi magesthatareusef ulint heproductionofcommer cialart.
    Thecomput erwoul dcost$20,
    000andhav eanexpect edlif
    eofei ghtyears.The Questi
    ons84&85ar ebasedont hefollowinginfor
    mat i
    on. Barfi
    eld
    comput erisexpectedtogenerat
    eaddi t
    ional annualnetcashr eceipts(before-
    tax) L&M Ir
    onworksisconsi deri
    ngapr oposalt osellanexist
    inglatheandpur chasea
    of$6,000pery ear.Thecomputerwi l
    lbedepr eci
    atedaccor dingt othest rai
    ght- new comput er-
    operated lathe.Informat i
    on on t he existi
    ng lathe and the
    l
    inemet hodandt hefi
    rm'smargi
    naltaxrat eis25per cent
    . computer-
    operatedl
    at hefoll
    ow:
    Existi
    ng Comput er
    -operated
    79.Whatist
    heafter
    -t
    axpay
    backper
    iodf
    ort
    hecomput
    erpr
    oject
    ? Lathe l
    athe
    a.7.62year
    s c. 4.
    44y
    ear
    s Cost $100, 000 $300,000
    b.3.90year
    s d.3.11y
    ear
    s Accumulateddepr eci
    ati
    on 60,
    000 0
    Salv
    agev al
    uenow 20,
    000
    80.(Presentval
    uetabl
    esneededtoanswerthisquest i
    on.
    )Whatistheaft
    er-t
    ax Salv
    agev al
    uein4y ear
    s 0 60,
    000
    netpresentv
    alueoft
    heproposedpr
    oject(usinga16percentdi
    scountr
    ate)? Annualdepreci
    ation 10,
    000 75,
    000
    a.$2, 261 c. $6,062 Annualcashoper ati
    ngcost s 200,000 50,
    000
    b.$( 454) d.$( 4,797)
    CMAEXAMI NATIONQUESTIONS Page63of63
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Remai
    ningusef
    ull
    i
    fe 4y
    ear
    s 4y
    ear
    s peryeari
    noper
    ati
    ngcosts.Daneche'scostofcapi
    tal
    is12%.
    Fortenperi
    odsat12%,t hepresentval
    ueofP1i sP0.3220,whi
    l
    ethepr
    esent
    84.Whatist
    hepaybackper
    iodf
    ort
    hecomputer
    -operat
    edl
    athe? val
    ueofanordi
    naryannui
    tyofP1i sP5.
    650.
    a.1.87year
    s c. 3.
    53y ear
    s
    b.2.00year
    s d.3.29y ear
    s *
    . Whatisthenetpr
    esentval
    ueoft
    hepr
    oposedinvest
    ment,assumi
    ngDaneche
    usesa12%discountrat
    e?(M)
    85.(Pr
    esentvaluetablesneededtoanswerthisquesti
    on.)I
    fthecompanyuses a.P185,640 c. P139,
    000
    10percentasitsdiscountr
    ate,
    whatisthenetpresentval
    ueofthepr
    oposed b.P69,980 d.Noneoft heabove.
    newlathepurchase?
    a.$236,465 c. $195,
    485 *
    . Witht
    hecompany’
    sini
    ti
    ali
    nvest
    mentonthenew machi
    ne,t
    heaccount
    ing
    b.$256,465 d.$30,422 rat
    eofret
    urni
    s(M)
    a.15% c. 25%
    Questi
    ons1&2ar ebasedont hefol
    l
    owingi
    nfor
    mati
    on. H&M b.20% d.Noneoftheabove.
    Marri
    ottSer
    vicesisconsi der
    inganinv
    estmentof$50,
    000.Dat arel
    atedt
    othe
    i
    nvestmentareasf ol
    l
    ows: Questi
    ons11and12ar ebasedont hef ol
    lowingi nfor
    mat i
    on. RPCPA1079
    Year CashInflows Andal
    uciaMachineCor porat
    ioninvestedinmachi newithausefulli
    feofsi
    xy ears
    1 $20,000 andnosal vagev al
    ue. Themachi newasdepr eci
    atedusingt hestrai
    ght-l
    ine
    2 22,
    000 method. Theannualcashi nf
    low from oper ati
    ons,netofi ncomet axeswas
    3 16,
    000 P2,
    000.Thepr esentvalueofanor dinaryannui t
    yofP1i nar
    rearsforsi
    xy ear
    sat
    4 30,
    000 14%is3.889.Thepresentv alueofP1f orsixper i
    odsat14%i s0.456.
    5 30,
    000 *. AssumingthatAndal uci
    ausedat i
    meadj ust edrateofreturnof14%,what
    Costofcapi
    talis14percent. wastheamountoft heor i
    ginali
    nvestment ?(E)
    a.P7,778 c. P8, 687
    cl
    vi
    i
    .Whatisthepaybackperi
    odiny
    ear
    sappr oxi
    mat
    edt
    otwodeci
    malpoi
    nts, b.P8,235 d.P9, 048
    assumi
    ngnotaxesarepai
    d?
    a.2.12 c. 2.
    50 *
    . Assumingthatt
    heminimum desiredr ateofret
    urnont
    hisinv
    est
    mentwas
    b.4.00 d.3.00 14% andtheamountoftheori
    ginalinv est
    mentwasP7,
    500,whatwoul
    dbe
    thenetpr
    esentv
    aluet
    othenearestpeso?( E)
    cl
    vi
    i
    .i
    Whati
    sthenetpr
    esentv
    alueoft
    hei
    nvest
    ment
    ,assumi
    ngnot
    axesar
    epai
    d? a.P0 c. P278
    a. $29,
    650 c. $50,
    000 b.P196 d.P345
    b. $78,
    588 d. $28,
    588
    NetInvestment
    ,AnnualCashFlow&NPV
    NetInvestmentandNPV Questi
    on13t hr
    ough15ar ebasedonthefol
    lowi
    nginformati
    on. RPCPA1089
    Probl
    em 15and16ar ebasedonthefoll
    owinginf
    ormati
    on. RPCPA1086 A proposaltomanagementofCel i
    neCompanyhasbeenmadet oef fectt
    he
    Daneche’s,atax-exemptenti
    ty,pl
    anst opurchaseanew machinewhi chthey repl
    acementofanol dmachinewithamoder none,yiel
    dingahigherproducti
    on
    pr
    ojecttodepr eciat
    eov eraten-y
    earperiodwi t
    houtsalv
    agevalue. Thenew capacit
    y.Thefoll
    owingrel
    evanti
    nformat
    ionwasgivenforeval
    uati
    on:
    machinewi l
    lcostP200,
    000andi sexpect
    edtogeneratecashsav
    ingsofP60,
    000 Netbookvalueoftheoldmachine P
    23,000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page64of64
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Resal
    eval
    ueoft
    heol
    dmachi
    ne Pr
    esentv
    alueofordi
    nar
    yannui
    tyofP1.
    00i
    nar
    rear
    sfor10y
    ear
    sat18%i
    s4.
    494.
    30,
    000 Pr
    esentv
    alueofP1.00f
    or10year
    sat18%i
    s0.
    191.
    Costoft
    henewmachi
    ne
    300,000 *
    . Theneti
    nvest
    mentaf
    teri
    ncomet
    axi
    s
    Annualcash sav i
    ngs bef oret ax,due toincrease i
    n a.P180,000 c. P196,
    750
    effici
    ency 85,000 b.P185,000 d.P181,750
    Incomet axrate 35%
    Est i
    matedusefulli
    feoft henewmachi newithasal v
    age *
    . Theannual
    cashf
    lownetoft
    axi
    s
    valueofP3,000 10years a.P35,750 c. P35,
    500
    Mi nimum desir
    edrateofr eturnonthi
    sinvest
    ment 20% b.P42,750 d.P42,575
    TheCompanyusest hest r
    aight -
    li
    nemet hodofdepr eci
    ati
    on. I
    nformati
    onon
    presentv al
    uefactor
    sfoll
    ows: *
    . Thenetpresentval
    ueoft
    hei
    nvest
    menti
    s
    PresentvalueofP1.00for10y earsat20% 0.162 a.(P7,712.95) c. P10,
    537.
    05
    Presentvalueofordinar
    yannui t
    yofP1.00inarr
    earsfor10 4. 192 b.P9,582.05 d.P12,287.
    05
    year s
    NetInvest ment,PaybackPer iod, NPV&I RR
    *
    . Whatwoul
    dbet
    heannual
    cashf
    lownetoftax? Questions17t hrough20ar ebasedont hefollowinginformation. RPCPA1084
    a.P65,
    645 c. P55,
    000 Sta.LuciaCompanyi sconsi der i
    ngt hepur chaseofanewequi pmentatapr i
    ceof
    b.P55,
    300 d.P67,750 P400,000. I fthe new equi pmenti s acqui red,an ol d machine thatisfully
    depreciatedwil
    lbedi sposedf orP50, 000.
    *
    . Whatwoul
    dbet
    heneti
    nvest
    mentaf
    teri
    ncometax? Thenewequi pmenti sexpect edt opr ov i
    deannualsav ingsinoper at
    ingcostsof
    a.P297,
    550 c. P270,
    000 P150,000bef orededuct i
    ngdepr eciationori ncomet ax.Thenewequi pmenthas
    b.P272,
    450 d.P250,645 anestimat edli
    feof5y earsandwi llhav enosal vagev alueatt heendof5y ears.
    I
    ncomet axi satt her ateof35% f orbot htheor dinaryincomeandonanygai n
    *
    . Whatwouldbethenetpr
    esentv
    alueofthei nv
    estment
    ?(r
    oundedt
    othe from t
    hesal eofequi pment .Forsi mi lartypeofi nvestment ,
    thecompanyexpect s
    near
    estpeso) ami ni
    mum r ateof20%.
    a.P2,734 c. P3,220 Theappr opr
    iatepr esentv aluet ablet haty oumayusei nt hisproblem i
    sas
    b.P3,660 d.P( 40,146) foll
    ows:
    Presentv alueofP1 Presentv al
    ueofP1r eceivedper
    Number s10,11and12ar ebasedont hefoll
    owingdata. RPCPA1088 peri
    od
    ThemanagementofPAMA,I NC.isplanningt orepl
    aceanol dmachi nerywhi ch Per i
    od 20% 22% 20% 22%
    hasanetbookv alueofP15, 000andar esal
    ev al
    ueofP20, 000. Thenew 1 0.833 0. 820 0.833 0.820
    machi nerywi l
    lcostP200,000wi t
    hanest i
    matedusefulli
    feof10y earsand 2 0.694 0. 672 1.528 1.492
    sal
    v agev al
    ueofP5, 000.Theexpectedincreaseineff
    ici
    encywillresultinannual 3 0.579 0. 551 2.106 2.042
    cashsav i
    ngsofP55, 000befor
    etax. Thecompanyi susingt hest raight
    -l
    ine 4 0.482 0. 451 2.589 2.494
    methodofdepr eci
    ationandincomet axrateis35%.Themi nimum desi redrate 5 0.402 0. 370 2.991 2.864
    ofreturnont hi
    sinvestmenti
    s18%.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page65of65
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    *
    . Theamountofneti
    nvest
    menti
    nthenewequipmentis operati
    ngcostsavingsof$3, 650f oreachofthenext4y ear
    s.Inadditi
    on,thi
    s
    a.P350,
    000 c. P400,
    000 new machi newouldallow t
    heproduct i
    onofonenew t ypeofbagelt hatwould
    b.P367,
    500 d.P450,000 resul
    tinsel l
    ing1,500dozenmor ebagel seachy ear
    .Thecompanyear nsa
    contri
    buti
    onmar gi
    nof$0. 90oneachdozenbagel ssol
    d.Thepur chasepr i
    ceof
    *
    . Thepaybackperi
    odusi
    ngr
    etur
    nsbef
    oredepreciat
    ionandt
    axesi
    s thi
    smachi neis$13,450anditwillhavea4-yearusef
    ull
    ife.Bugle'
    sdiscountrat
    e
    a.2.45years. c. 3.
    0y ear
    s. i
    s14%.
    b.2.67years. d.4.0y ear
    s.
    75.The t
    otalannualcash i
    nfl
    ow f
    rom t
    his machi
    ne f
    orcapi
    talbudget
    ing
    *
    . Thenetpresentv
    alueoft
    hei
    nvest
    mentofthenewequi pmenti
    s pur
    posesis:(
    E)
    a.zero c. P25,870.00 a.$3,650. c. $4,
    750.
    b.P7,870.50 d.P( 24,630) b.$5,150. d.$5,000.

    *
    . Thediscount
    edrat
    eofr
    etur
    nont henewequipmentis 76.Thei
    nter
    nal
    rat
    eofr
    etur
    nfort
    hisi
    nvestmentiscl
    osestt
    o:(
    M)
    a.20% d.22% a.14%. c. 18%.
    b.lessthan20% e. Answernotgi
    ven b.16%. d.20%.
    c. morethan20%butl
    essthan22%
    77.Thenetpresentv
    alueoft
    hisi
    nvest
    menti
    sclosestt
    o:(
    E)
    Annual NetCashInf
    low&Pay back a.$1,120. c. $13,450.
    Questions1&2ar ebasedont hefol
    lowinginfor
    mation. H&M b.$6,550. d.$20, 000.
    Fi
    nchCompanyi sconsi der
    ingani nv
    estmenti nequipmentf or$30,
    000.Fi nch
    usest hestrai
    ght-
    li
    nemet hodofdepr eci
    ationwithnomi d-yearconventi
    on.I n ARRandPay back
    addit
    ion,thei
    rtaxrateis40per centandt hel i
    feoftheequipmentisf i
    vey ears Questions16and17ar ebasedont hefol
    lowinginformati
    on. RPCPA1080
    withnosal vagevalue.Theexpect edincomebef oredepreciati
    onandt axesi s Amanuf acturi
    ngf ir
    mi sstudyi
    ngt hepurchaseofaP50, 000equipmentwi t
    han
    proj
    ectedtobe$15,000pery ear. esti
    mat edlifeoff i
    vey ears.Thenewequi pmenti sexpectedtogivethecompany
    netcashi ncomebef oreincomet axesofP15,000ay ear
    .Theequi pmentshallbe
    cl
    i
    x
    .Whatist
    hepay
    backper
    iodi
    nyear
    sappr
    oximat
    edt
    otwodeci
    mal
    poi
    nts? depreciatedonast raight-
    li
    nebasi swit
    hnosal vagev alue. Assumet hatthe
    a.1.00 d.4.00 i
    ncomet axrateis40%.
    b.2.00 e. 0.
    38 *. Theaccount ing(bookv al
    ue)rateofreturnont heini
    tiali
    ncreaseinrequi
    red
    c. 2.
    63 i
    nv estmenti s(E)
    a.6% c. 18%
    cl
    x
    .Whati
    stheannual
    netcashi
    nfl
    owf
    ory
    ear1? b.10% d.30%
    a.$15,
    000 c. $11,
    400
    b.$9,
    000 d.$6,000 *
    . Thepaybackper
    iodi
    s(E)
    a.2y ear
    s c. 3.
    85y ear
    s
    Annual CashFlow,NPV&IRR b.3.33years d.10y ears
    Questions75t hr
    u77arebasedonthefol
    l
    owinginf
    ormati
    on. G&N9e
    (Ignoreincomet axesi
    nthi
    sprobl
    em.)Bugl
    e'sBagelBaker
    yisi
    nvest
    igat
    ingt
    he Quest
    ions101and102ar
    ebasedont
    hef
    oll
    owi
    ngi
    nfor
    mat
    ion. Bar
    fi
    eld
    purchaseofanewbagelmaki ngmachi
    ne.Thi
    smachi newoul
    dpr
    ovideanannual
    CMAEXAMI NATIONQUESTIONS Page66of66
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Ji
    mmy '
    sRet ai
    lisconsideri
    ngani nvest
    mentinadel iv
    eryt
    ruck.Ji
    mmyhasf ound Annual
    costsavings 15,000
    ausedtruckthathecanpur chasefor$8,
    000.Heest imat
    est het
    ruckwoul dlast Li
    feofthemachine 8years
    si
    xyearsandi ncreasehisst or
    e'snetcashrevenuesby$2,000pery ear.Att he Thecompanyusesst r
    aight
    -l
    inedepreci
    ationanda$5,000sal
    vagevalue.(The
    endofsi
    xy ears,thetruckwouldhav enosalvagev al
    ueandwouldbedi scarded. companyconsider
    ssalvagev al
    ueinmaki ngdepr
    eci
    ati
    ondeduct
    ions.
    )Assume
    Ji
    mmywi lldepreciat
    ethetruckusingthest
    rai
    ght-l
    inemethod. cashfl
    owsoccurunifor
    ml yt
    hroughoutayear.

    101. Whatistheaccounti
    ngrateofr
    etur
    nont het
    rucki
    nvest
    ment(
    basedon 101. Thepaybackper
    iodwoul
    dbecl
    osestt
    o:(E)
    av
    erageprof
    itandav
    eragei
    nvest
    ment)? a.3.
    33years. c. 8.
    0year
    s.
    a.25.0% c. 16.
    7% b.3.
    0years. d.2.9year
    s.
    b.50.0% d.8.3%
    102. Thesi
    mpl
    erat
    eofr
    etur
    nwoul
    dbecl
    osestt
    o:(
    E)
    102. Whatisthepay
    backper
    iodont
    hei
    nvest
    mentint
    henewt
    ruck? a.30.
    0%. c. 18.
    75%.
    a.12years c. 4year
    s b.17.
    5%. d.12.5%.
    b.6years d.2y ear
    s

    Questi
    ons99&100ar ebasedonthefol
    lowingi
    nfor
    mat i
    on. G&N9e Quest ions103&104ar ebasedonthefol
    lowi nginfor
    mation. AI
    CPAadapt ed
    (Ignor
    ei ncomet axesint hi
    sprobl
    em.)FastFood,Inc.,haspurchasedanew (Ignoreincomet axesinthispr
    oblem.
    )Hanl eyCompanypur chasedamachi nefor
    donutmaker .Itcost$16,000andhasanest i
    matedli
    feof10years.Thefoll
    owing $125, 000thatwillbedepreci
    atedonthestrai
    ght -
    li
    nebasisov erafiv
    e-y
    earperiod
    annualdonutsal esandexpensesareproject
    ed: wi t
    hnosal vagev alue.Therelat
    edcashflowf r
    om operati
    onsi sexpectedtobe
    Sales $22,000 $45,000ay ear.Thesecashf lowsfr
    om oper at
    ionsoccuruni for
    mlythroughout
    Expenses: they ear.
    Flour,etc.,r
    equir
    edinmakingdonuts $10,
    000
    Salari
    es 6,
    000 103. Whati
    sthepay
    backper
    iod?(
    E)
    Depreciation 1,
    600 17,600 a.2.
    1year
    s. c. 2.
    8year
    s.
    Neti ncome $4,400 b.2.
    3year
    s. d.4.2year
    s.

    99.Thepaybackper
    iodont
    henewmachi
    neiscl
    osestto:
    (E) 104. Whati
    sthesi
    mpl
    erat
    eofr
    etur
    nontheini
    ti
    ali
    nvest
    ment
    ?(E)
    a.5y ears. c. 3.
    6years. a.16%. c. 28%.
    b.2.7y ear
    s. d.1.4years. b.24%. d.36%.

    100. Thesi
    mpl
    erat
    eofr
    etur
    nfort
    henewmachinei
    scl
    osestt
    o:(
    E) ARR&NPV
    a.20%. c. 27.
    5%. Questi
    ons8and9ar ebasedonthefoll
    owinginformat i
    on. RPCPA0585
    b.37.
    5%. d.80.0%. Inf
    ormati
    onconcer ni
    ngtwoproductsortheChampacaCompanyi sgivenbelow:
    Catl
    eyaCompany ,atax-
    exemptentit
    y,isplanningt opurchaseanew machi ne
    Questi
    ons101&102ar ebasedonthefol
    lowingi
    nfor
    mati
    on. G&N9e whichitwilldepreci
    ateonast rai
    ght-
    li
    nebasisov eraten-yearperi
    odwi thno
    (I
    gnoreincomet axesi
    nthi
    sprobl
    em.)Purvel
    lCompanyhasj
    ustacqui
    redanew sal
    vagev alue. Thenew equi
    pmentcost i
    ngP150, 000isexpectedt oproduce
    machine.Dataonthemachi
    nefoll
    ow: cashsavi
    ngsofP33, 000peryearinoperati
    ngcost s.Catleya’
    scostofcapi t
    alis
    Purchasecost $50,
    000 16%.Fort enper i
    odsat16%,thepresentval
    ueofP1i s0.227,whil
    ethepr esent
    CMAEXAMI NATIONQUESTIONS Page67of67
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    v
    alueofanannuityofP1isP4.833. i
    ft heequipmentwer eacqui
    red. Theequipment
    ’sesti
    mat edusefull
    ifeis10
    *
    . Assumi ngthatCatl
    eyausesadiscountrat
    eof15%,thenetpr
    esentv
    alueof years,wit
    h no r
    esidualval
    ue,and would bedepreci
    ated bythest r
    aight
    -l
    ine
    thepr
    oposedinvest
    mentis: met hod.Tam’spredeter
    minedminimum desir
    edrateofretur
    nis12%.Pr esent
    a.P9,489 c. P75,
    000 val
    ueofanannui t
    yof1at12%f or10peri
    odsis5.65.Presentval
    ueof1duei n
    b.P34,050 d.P180,000 10per i
    odsat12%is0.322.

    *
    . Based on t
    he Company’
    sini
    ti
    ali
    nvest
    mentint
    he new equi
    pment
    ,the cl
    xi
    ii. Thepay
    backper
    iodi
    s(E)
    account
    ingr
    ateofr
    etur
    nis a.4.0year
    s. c. 4.
    5year
    s.
    a.8% c. 16% b.4.4year
    s. d.5.0year
    s.
    b.12% d.25%
    cl
    xi
    v .Inesti
    mati
    ngtheinter
    nalr
    ateofr
    etur
    n, t
    hefactor
    sinthetabl
    eofpr
    esent
    Quest i
    ons1&2ar ebasedont hefoll
    owinginformati
    on. val
    uesofanannui
    tyshoul
    dbetakenf
    rom thecolumnsclosestt
    o
    8.JohnsonCompanyi nv est
    si nanewpl aceofequi pmentcosti
    ng$20,000.The a.0.65 c. 5.00
    equi
    pmenti s expect ed toy i
    eldthe foll
    owing amounts pery earf ort
    he b.1.30 d.5. 65
    equi
    pment ’
    sf our-yearusef ulli
    fe:
    Cashrev enues $30,000 cl
    xv. Accr
    ual
    account
    ingr
    ateofr
    etur
    nbasedonini
    ti
    ali
    nvest
    menti
    s
    Cashexpenses (
    16,000) a.30% c. 12%
    Depreci
    at i
    onexpenses (5,000) b.20% d.10%
    I
    ncomepr ovidedf rom equipment $9, 000
    Costofcapi tal 14percent ARR, PaybackandNPV
    Thereisnosal vagev alueatt heendoff ouryear
    s. Questions1through3arebasedont hefoll
    owinginfor
    mat ion.
    cl
    xi
    .Whati st he account ing rate ofreturn on av er
    age i
    nvestmentf orthe Acompanyi spl anni
    ngtoacqui
    reanew machi necost i
    ng$120, 000.Ithasan
    equi
    pment ,assumi ngnot axesarepaid? economi cusefull i
    feof3y ear
    swi thnosal vagev al
    ue. I thasat heoreti
    cal
    a.100. 0% d.90. 0% capacityof100,000machinehours.Itcanproduceoneuni tperhour.Itexpects
    b.6. 3% e. 14.0% tosell80,000unitsperyear
    .Themachi newillreducelaborcostsf r
    om $2.50to
    c. 70.0% H&M $1.50permachi nehour.

    cl
    xi
    i
    .Whati sthenetpr
    esentv
    alueoft
    hisi
    nvest
    mentinequi
    pmentassumi
    ngno cl
    xvi. Whati
    sthenetpr
    esentv
    alueoft
    hisi
    nvest
    ment?Usethef
    act
    orsgi
    ven
    taxesarepaid? bel
    ow.
    a.$40, 796 d.$26,226 Years PV$1at10%
    b.$20, 796 e. $17,
    760 1 0.
    91
    c. $(2,
    240) H&M 2 0.
    83
    3 0.
    75
    ARR&I RR 4 0.
    68
    I
    tems74t hr
    u76arebasedonthefol
    lowi
    ng: 5 0.
    62
    Tam Co.i
    snegoti
    ati
    ngforthepur
    chaseofequipmentt
    hatwoul
    dcost$100,
    000, 6 0.
    56
    wit
    htheexpect
    ati
    onthat$20,
    000peryearcoul
    dbesavedinaf
    ter
    -t
    axcashcost
    s A. $79,
    200 C.$129,000

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page68of68
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    B.$120,
    000 D.$199,
    200 CI
    A0589I
    V- 2 0.
    80 1.
    69
    22 3 0.
    71 2.
    40
    4 0.
    64 3.
    04
    cl
    xvii
    .Whatistheaccount
    ing(
    book)r
    ateofr
    etur
    nont
    heav
    eragei
    nvest
    ment 5 0.
    57 3.
    61
    fort
    he3-
    yearper
    iod? 6 0.
    51 4.
    12
    A.10% C.67%
    B.33% D.80% CI
    A0589IV- cl
    xi
    x. Theaccount
    ingr
    ateofr
    etur
    nfort
    heinvestmentpr
    oposal
    is
    23 a.12.
    0% c. 28.0%
    b.17.
    2% d.34. 4%
    cl
    xvii
    i
    .Whati
    sthepay
    backper
    iod?
    A.1.
    50year
    s. C.2.
    00y
    ear
    s. cl
    xx. Thenetpresentv
    aluef
    ort
    hei
    nvest
    mentproposal
    is
    B.1.
    20year
    s. D.3.
    00y
    ear
    s. CI
    A0589I
    V-24 a.$106,
    160 c. $356,
    160
    b.$(97,
    970) d.$96,560
    Quest ions83t hr ough85ar ebasedont hefoll
    owinginformat i
    on.CMA06964- 23
    to25 cl
    xxi. Thetr
    adit
    ionalpay
    backper
    iodf
    ort
    hei
    nvest
    mentproposal
    is
    Jorel l
    eCompany ’sf inanci alstaffhasbeenr equested tor eview apr oposed a.Ov er5years. c. 1.
    65year
    s.
    i
    nv estmenti nnew capi talequi pment . Appl i
    cablefinancialdat aispresented b.2.23years. d.2.83year
    s
    below.Ther ewi llbenosal vagev alueatt heendoft heinv estment ’sli
    feand,due
    tor ealist
    icdepr eci ationpr act
    ices,itisest i
    matedt hatthesal v agev al
    ueandnet Quest i
    ons86t hrough88arebasedont hefoll
    owi ngi nformation.CIA 0593I V-
    22
    bookv alueareequalatt heendofeachy ear.Allcashf l
    owsar eassumedt otake to24
    placeatt heendofeachy ear.Fori nvestmentpr oposal,Jorel
    leusesa12%af ter
    - A companypur chased a new machi ne t
    o st amp t he companyl ogo on it
    s
    taxt argetrat
    eofr etur n. products.Thecostoft hemachi newas$250, 000, andi thasanest i
    mat eduseful
    Inv est mentPr oposal l
    ifeof5y earswithanex pectedsalvagev alueatt heendofi t
    susef ulli
    feof
    Pur chaseCost Annual NetAfter- Annual NetIncome $50,000.Thecompanyusest hestr
    aight-
    li
    nedepr eciati
    onmet hod.
    Yea andBookVal ue TaxCashFl ows Thenewmachi neisexpectedtosave$125, 000annual lyinoper ati
    ngcost s.The
    r company ’
    st axrat
    ei s40%,andi tusesa10% di scountr atet oev al
    uatecapital
    0 $250, 000 $ 0. $ 0. expenditure.
    1 168, 000 120, 000 35,000 Year Pr esentValueof$1 Pr esentVal ueofanOr di
    nar yAnnuityof
    2 100, 000 108, 000 39,000 $1
    3 50,000 96,000 43,000 1 .
    909 .909
    4 18,000 84,000 47,000 2 .
    826 1.736
    5 0 72,000 51,000 3 .
    751 2.487
    4 .
    683 3.170
    Yea P.V.of$1Recei
    ved P.
    V.ofanAnnuit
    yof$1.00 5 .
    621 3.791
    r att
    heEndofEachPeriod Recei
    ved
    attheEndofEachPer
    iod cl
    xxii
    .Whati
    sthet
    radi
    ti
    onal
    pay
    backper
    iodforthenewstampi
    ngmachi
    ne?
    1 0.
    89 0.
    89 a.2.
    00year
    s. c. 2.
    75y ear
    s.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page69of69
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.2.
    63y
    ear
    s. d.2.
    94y
    ear
    s. 4 .
    42 2.
    40
    5 .
    34 2.
    74
    cl
    xxiii
    .Whati
    st heaccount
    ingrat
    eofr
    eturnbasedont
    heav
    eragei
    nvest
    menti
    n 6 .
    28 3.
    02
    thenewstampingmachine? 7 .
    22 3.
    24
    a.20.4% c. 40.
    8%
    b.34.0% d.51.0% cl
    xxv.Thet
    radi
    tional
    pay
    backper
    iodf
    ort
    hei
    nvestmentproposal
    is(
    E)
    A..
    875years. C.2.250years.
    cl
    xxiv
    .Whatist
    henetpr
    esentv
    alue(
    NPV)ofthenewstampi
    ngmachi
    ne? B.1.
    933years. D.Ov er5years.
    a.$125,
    940 c. $250,
    000
    b.$200,
    000 d.$375,940 cl
    xxv i
    .Theav er
    ageannualcashinf
    low atwhichYi
    pannwoul
    dbei
    ndi
    ff
    erentt
    o
    theinv
    estment(r
    oundedtothenearestdol
    l
    ar)i
    s( E)
    Questi
    ons122t hrough125ar ebasedont hefoll
    owinginformati
    on.CMA 12914- A.$21, 000. C.$38,
    321.
    1to4 B.$30, 000. D.$46,
    667.
    Yi
    pannCor porationi srevi
    ewingani nvestmentpr oposal.Theinit
    ialcostaswell
    asotherrel
    ateddat aforeachyearar epresentedint heschedulebelow.Allcash cl
    xxvii
    .Theaccount
    ingrat
    eofr et
    urnfortheinvest
    mentpr
    oposalov
    eri
    tsl
    i
    fe
    fl
    owsar eassumedt ot akepl
    aceatt heendoft hey ear
    .Thesalvagev alueofthe usi
    ngtheini
    ti
    alv
    alueofthei
    nvest
    mentis(E)
    i
    nvestmentatt heendofeachy earisequalt oit
    snetbookv al
    ue,andt herewil
    lbe A.36.2%. C.28.1%.
    nosalvagevalueatt heendoft heinvestment '
    sli
    fe. B.18.1%. D.38.1%.

    I
    nvestmentProposal cl
    xxvi
    i
    i.Thenetpr
    esentv
    alueoft
    hei
    nvest
    mentproposali
    s(E)
    I
    nit
    ial Cost Annual NetAfter
    - Annual A.$4,600. C.$(55,
    280).
    Year andBookVal ue TaxCashFl ows NetIncome B.$10,450. D.$115,450.
    0 $105, 000 $0 $0
    1 70, 000 50,000 15,000 Questions80t hr
    u82ar ebasedont hefoll
    owinginformati
    on. G&N9e
    2 42, 000 45,000 17,000 (Ignoreincomet axesi nt hispr oblem.)Orient
    alCompanyhasgat
    hered the
    3 21, 000 40,000 19,000 foll
    owingdataonapr oposedi nvestmentproject:
    4 7,000 35,000 21,000 Investmenti ndepr eciableequipment...
    .. $200,
    000
    5 0 30,000 23,000 Annual netcashf lows. ...
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    . $50,
    000
    Lif
    eoft heequi pment. .
    ..
    ...
    ..
    ..
    ..
    ..
    ..
    .. 10years
    Yi
    pannusesa24%af ter-
    taxtargetrat
    eofretur
    nfornewi nvest
    mentpr
    oposal
    s. Salvagev alue...
    ..
    ..
    ...
    ..
    ...
    ..
    ..
    ..
    ...
    ..
    . -
    0-
    Thedi
    scountf
    iguresfora24%r ateofretur
    naregiven. Discountr ate..
    ..
    ..
    ....
    ..
    ...
    ..
    ..
    ..
    ..
    ..
    .. 10%
    PresentVal ueof$1.00 Pr
    esentValueofanAnnuityof Thecompanyusesst r
    aight -
    li
    nedepr eci
    ati
    ononal lequi
    pment.
    Year Recei
    vedatt heEndof $1. 00Receiv
    edatt heEndofEach
    Peri
    od Peri
    od 80.Thepaybackperi
    odf
    ort
    hei
    nvest
    mentwouldbe: (
    E)
    1 .81 .
    81 a.2.41years. c. 10years.
    2 .65 1.
    46 b.0.25years. d.4y ears.
    3 .52 1.
    98

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page70of70
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    81.Thesi
    mpl
    erat
    eofr
    etur
    nont
    hei
    nvest
    mentwouldbe:
    (E) pr
    esstothenear
    estper
    cent
    ,assumi
    ngnot axesarepai
    d?
    a.10%. c. 15%. a.41.67% d.10. 00%
    b.35%. d.25%. b.8.33% e. 12.00%
    c. 75.
    00%
    82.Thenetpresentv
    alueoft
    hisi
    nvest
    mentwoul
    dbe:(E)
    cl
    xxxi
    i
    i
    a.($14,
    350) . c. $77,
    200. . Whati
    sthenetpr
    esentv
    aluef
    ort
    hepr
    ess,
    assumi
    ngnot
    axesar
    epai
    d?
    b.$107,250. d.$200,000. a. $4,
    800 d. $696
    b. $19,
    896 e. $0
    ARR, Discount
    edPay back&NPV c. $19,
    200
    Quest ions68t hr
    ough70ar ebasedont hef ol
    lowinginfor
    mat i
    on. Gl
    eim cl
    xxxi
    v
    RexCompanyi sconsideri
    ngani nvestmentinanew pl antwhichwi llent ai
    lan . Whati
    stheinter
    nalrat
    eofr
    etur
    ntot henear
    estper
    centf
    ort
    hepr
    ess,
    i
    mmedi atecapit
    alexpendit
    ureof$4,000,000.Thepl anti
    st obedepr eciatedona assumi
    ngnotaxesarepai
    d?
    straight-l
    inebasisover10y ear
    stozer osalvagev al
    ue.Operati
    ngi ncome( before a.10% d.8%
    depr eciati
    onandt axes)isexpect
    edt obe$800, 000pery earoverthe10- yearl i
    fe b.12% e. 14%
    oft hepl ant.Theoppor t
    unitycostofcapi t
    alis14%.Assumet hatther ear eno c. 42%
    taxes.
    ARR,NPV, I
    RR&Annual CashFlow
    cl
    xxix.Whati
    sthebook(
    oraccount
    ing)r
    ateofr
    etur
    nfort
    hei
    nvest
    ment
    ? Questi
    ons1t hr
    u4ar ebasedont hefol
    lowinginformat
    ion. H&M
    A.10% C.28% RandallCorpisconsideri
    ngt hepurchaseofanew machi nef or$40,000.The
    B.20% D.35% machinewoul dgenerateanetcashi nf
    low beforedepreciati
    onandt axesof
    $14,
    389pery earforfi
    vey ear
    s.Attheendoff iv
    ey ear
    s, t
    hemachi newouldhave
    cl
    xxx.Whati
    sthedi
    scount
    edpay
    backper
    iodf
    ortheinvest
    ment
    ? nosalvagev al
    ue.Thecompany ’
    scostofcapi t
    alis12per cent.Thecompany
    A.5.
    5year
    s. C.9.2years. usesstrai
    ght-
    li
    nemet hodofdepreciat
    ionwithnomi d-
    y earconv enti
    onandhasa
    B.7.
    1year
    s. D.11.7years. 40percenttaxrat
    e.
    cl
    xxxv
    cl
    xxxi
    .Whatist
    heNPVf
    ort
    hei
    nvest
    ment
    ? . Whati stheaccount
    ingr
    ateofret
    urnont heor
    igi
    nali
    nvest
    menti
    nthe
    A.$172,
    800 C.$312,
    475 machineappr
    oxi
    matedtotwodeci
    malpoi
    nts?
    B.$266,
    667 D.$428,
    956 a.35. 97% d.9.58%
    b.19. 17% e. 0.
    00%
    ARR,NPV&I RR c. 15.97%
    Questi
    ons1thru3arebasedont hef ol
    lowinginfor
    mati
    on. H&M cl
    xxxv
    i
    Orow Pri
    ntShopisconsi der
    ingt hepur chaseofausedpr inti
    ngpresscosting . Whati
    sthenetpr
    esentv
    aluef
    ort
    hemachine?
    $19,
    200.Theprint
    ingpresswoul dgener ateanetcashinfl
    owof$8,000pery ear a.$2,659 c. $42,
    659
    fort
    hreeyear
    s.Attheendoft hreey ears,thepresswoul
    dhav enosalv
    agev al
    ue. b.$0 d.$11,872
    Thecompany ’
    scostofcapi talis10per cent.Thecompanyusesst r
    aight-
    li
    ne cl
    xxxv
    ii
    depr
    eciat
    ionwit
    hnomi d-yearconv enti
    on. . Whatist
    hei
    nter
    nalr
    ateofr
    etur
    nfort
    hemachi
    neroundedt
    othenear
    est
    per
    cent?
    cl
    xxxi
    i
    . Whatist
    heaccount
    ingr
    ateofr
    etur
    nont
    heor
    igi
    nali
    nvest
    menti
    nthe a.below12per
    cent d.bet
    ween16and18percent
    CMAEXAMI
    NATI
    ONQUESTIONS Page71of71
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.between12and14per
    cent e. abov
    e18per
    cent $1,
    500,000.The equipmentwi l
    lbe depreci
    ated to zero salv
    age val
    ue on a
    c. bet
    ween14and16per
    cent str
    aight-
    li
    ne basi
    s ov er5 years.The expansion wi l
    lpr oduce i
    ncrement
    al
    operati
    ngrevenueof$400,000annual
    lyfor5y ears.Thecompany 'sopport
    uni
    ty
    cl
    xxxv
    ii
    i
    .Whatist
    heannual
    netaf
    ter
    -t
    axcashinfl
    owperyear(
    roundedof
    f)? costofcapit
    alis12%.Ignor
    etaxes.
    a.$14,
    389 c. $3,
    200
    b.$8,
    633 d.$11,833 cxci
    ii
    .Whati
    sthepay
    backper
    iodoft
    heproj
    ect
    ?
    A.2year
    s. C.3.75year
    s.
    Questi
    ons1t hr
    u4arebasedont hefol
    lowingi nfor
    mation. H&M B.2.
    14year
    s. D.5y ear
    s.
    Harr
    isonCompanyi sconsideringthepur chaseofanew machi nefor$80,000.
    Themachi newouldgeneratenetcashi nf l
    ow beforedepreciat
    ionandt axesof cxci
    v.Whati
    sthebook(
    account
    ing)r
    ateofr
    etur
    nofthei
    nvest
    ment
    ?
    $31,
    294pery earf
    orfouryears.Attheendoff ouryear
    s,themachi newouldhav e A.6.
    67% C.16.67%
    nosalvagev al
    ue.Thecompany ’
    scostofcapi talis12per cent.Thecompany B.13.
    33% D.26.67%
    usesstr
    aight
    -li
    nedepreci
    ati
    onwi thnomi d-yearconventi
    onandhasa40per cent
    taxr
    ate. cxcv. Whatist
    heNPVoft
    hei
    nvest
    ment
    ?
    A.$0 C.-
    $116,
    000
    cl
    xxxi
    x
    . Whatist
    heaccount
    ingr
    ateofretur
    nont heor
    igi
    nali
    nvest
    menti
    nthe B.-$58,
    000 D.$1,
    442,
    000
    machi
    neapproxi
    mat
    edtotwodeci
    malpoint
    s?
    a.14.12% c. 39.12% cxcvi
    .Whati
    stheI
    RRoft
    hei
    nvest
    ment
    ?
    b.8.47% d.16. 92% A.10.
    43% C.16.
    32%
    B.12.
    68% D.19.
    17%
    cxc
    .Whati
    sthenetpr
    esentv
    aluef
    ort
    hemachi
    ne?
    a.$81,
    320 c. $15,040 Questions71t hr
    u74ar ebasedonthefol
    lowi
    nginf
    ormat
    ion. G&N9e
    b.$1,
    320 d.$( 22,976) (
    Ignorei ncome t axes inthis pr
    oblem.
    )Shiel
    ds Companyhas gat
    hered t he
    fol
    l
    owi ngdataonapr oposedinvest
    mentproj
    ect
    :
    cxci
    .
    Whatistheint
    ernalr
    ateofret
    urnf
    orthemachi neroundedt
    ot henear
    est I
    nv estmentr equiredinequipment $400,000
    per
    cent? Annual cashi nfl
    ows $80,000
    a.below12percent d.bet ween16and18percent Salvagev alue $-0-
    b.between12and14percent e. above18percent Li
    feoft hei nvestment 10year s
    c. bet
    ween14and16percent Discountr ate 10%
    cxci
    i
    .
    Whatistheannual
    netaf
    ter
    -t
    axcashi
    nfl
    owpery ear
    ? 71.Thepay
    backper
    iodf
    ort
    hei
    nvest
    mentiscl
    osestt
    o:(E)
    a.$31,294 d.$29,667 a.0.2year
    s. c. 3.
    0years.
    b.$8,000 e. $26,
    76 b.1.0year
    s. d.5.0years.
    c. $18,
    776
    72.Thesi
    mpl
    erat
    eofr
    etur
    nont
    hei
    nvest
    menti scl
    osestt
    o:(
    E)
    ARR,Payback,NPV&I RR a.5%. c. 15%.
    Quest
    ions118t hr
    ough121ar ebasedonthefoll
    owi
    nginfor
    mation. Gl
    eim b.10%. d.20%.
    DonAdamsBr eweri
    esisconsider
    inganexpansi
    onproj
    ectwit
    hani nv
    est
    mentof
    CMAEXAMI NATIONQUESTI ONS Page72of72
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    73.Thenetpresentv
    alueont
    hisi
    nvest
    menti
    sclosestt
    o:(
    E) a.$304,
    060 c. $(
    70,
    000)
    a.$400,000. c. $91,
    600. b.$212,
    320 d.$712,
    320
    b.$80,000. d.$76,750.
    cxci
    x.Thetr
    adit
    ionalpay
    backper
    iodi
    s(E)
    74.Thei
    nter
    nal
    rat
    eofr
    etur
    nont
    hei
    nvest
    mentiscl
    osestt
    o:(
    M) a.Over5years. c. 1.
    65y
    ear
    s.
    a.11%. c. 15%. b.2.
    23years. d.2.83y
    ear
    s.
    b.13%. d.17%.
    cc.Theprof
    it
    abi
    l
    ityi
    ndexi
    s(E)
    ARR,Payback,
    NPV, PI&I RR a.0.61 c. 0.
    86
    Questi
    ons106through110ar ebasedont hefol
    lowinginformation. Glei
    m b.0.42 d.1.425
    Aproposedinvestmentisnotexpectedtohav eanysal vagev alueattheendof
    i
    ts5-yearl
    if
    e.Forpr esentvaluepur
    poses,cashf lowsar eassumedt ooccurat cci
    .Whichstatementaboutt
    heint
    ernal
    rat
    eofr
    etur
    nofthei
    nvest
    menti
    str
    ue?(
    E)
    theendofeachyear.Thecompanyusesa12%af t
    er-t
    axtargetrateofret
    urn. a.TheI RRisexactl
    y12%.
    PurchaseCost Annual NetAfter- Annual b.TheI RRisover12%.
    Year andBookVal ue TaxCashFl ows NetI ncome c. TheIRRisunder12%.
    0 $500,000 $ 0 $ 0 d.Noi nformati
    onabouttheI
    RRcanbedet
    ermined
    1 336,000 240,000 70,
    000
    2 200,000 216,000 78,
    000 DiscountRate,Prof
    it
    abil
    i
    tyIndex,IRR
    3 100,000 192,000 86,
    000 Quest i
    ons88through90arebasedont hefoll
    owinginformat i
    on. Barfi
    eld
    4 36,000 168,000 94,
    000 RCo.i si nv
    olv
    edi ntheevaluati
    onofanew comput er-i
    ntegratedmanufact
    uring
    5 0 144,000 102,
    000 system.Thesy st
    em hasapr oject
    edini
    ti
    alcostof$1,000,000.Ithasanexpected
    l
    ifeofsi xyear
    s,withnosalv ageval
    ue,andisexpectedt ogener at
    eannualcost
    DiscountFact
    orsfora12%RateofRetur
    n sav i
    ngsof$250,000.BasedonRCo. '
    sanalysi
    s,thepr ojecthasanetpr esent
    valueof$57,625.
    PresentValueof$1at PresentVal
    ueofanAnnui
    tyof
    Year TheEndofEachPer i
    od $1attheEndofEachPer
    iod
    88.(Presentval
    uetabl
    esneededt
    oanswerthisquest
    ion.
    )Whatdi
    scountr
    ate
    1 .89 .
    89
    di
    dt hecompanyusetocomput
    ethenetpr
    esentval
    ue?
    2 .80 1.
    69
    a.10% c. 12%
    3 .71 2.
    40
    b.11% d.13%
    4 .64 3.
    04
    5 .57 3.
    61
    89.Whatist
    hepr
    oject
    'spr
    ofi
    tabi
    l
    ityi
    ndex?
    6 .51 4.
    12
    a.1.058 c. .
    945
    b..058 d.1.000
    cxcvi
    i
    .Theaccount
    ingr
    ateofr
    etur
    nbasedontheaver
    agei
    nvest
    menti
    s(E)
    a.84.
    9% c. 40.
    8% 90.(Presentval
    uetabl
    esneededtoanswert
    hisquest
    ion.
    )Whatistheproj
    ect
    's
    b.34.
    4% d.12% i
    nternalr
    ateofr
    etur
    n?
    a.bet ween12.
    5and13.0percent c. between11.5and12.
    0percent
    cxcv
    ii
    i.Thenetpr
    esentv
    aluei
    s(E) b.bet ween11.
    0and11.5percent d.bet ween13.0and13.
    5percent
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page73of73
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    cci
    i
    i. Thenetpr
    esentv
    aluef
    ort
    hei
    nvest
    menti
    s
    PaybackPer iodandNPV A.$18,
    800. C.$196,
    200.
    Questi
    ons13and14ar ebasedont hefoll
    owingi nformation. RPCPA1082 B.$218,
    800. D.$91,
    743.
    TheSta.Cl araCompanyi splanningtoreplaceoneofi tsmachi nes.Theannual
    operat
    ingcostoft hemachi neisP150,000,excl udingdepr eci
    ati
    on,whilethatof Quest i
    ons76and77ar ebasedont hefoll
    owingi nformat ion. CMA6954- 5&6
    thenewmachi neisestimatedatP90,000.Thenewmachi newillcostP180,000 McLean I nc.is considering t
    he purchase ofa new machi ne t hatwi llcost
    netoft r
    ade- i
    nal l
    owancewi t
    hausef ullif
    eof10y ear
    s,wi t
    houtsalvagev alue. $160,000.Themachi nehasanest i
    mat edusef ullif
    eof3y ears.Assumet hat
    Assumecostofcapi taltobe12%andast r
    aight-l
    inedepr eci
    ati
    onchar ge.The 30%oft hedepr eci
    ablev aluebasewi l
    lbedepr eciatedi nthef ir
    sty ear,40%i nthe
    oldmachinei sf ul
    lydepreci
    ated.Thepr esentv al
    ueofanannui tyofP1.00f or10 secondy ear,and30% i nt hethir
    dy ear.Thenew machi newi l
    lhav ea$10, 000
    year
    sat12%i s5.6502.Ignoreincometaxi mplicati
    ons. resalevalueatt heendofi t
    sestimatedusefullife.Themachi nei sexpect edto
    *. Thepay backper iodwill
    be( E) savet hecompany$85, 000pery earinoperati
    ngexpenses.McLeanusesa40%
    a.2. 5y ears c. 4.29y ears esti
    mat edi ncomet axrateanda16%hur dleratet oev aluat ecapitalproject
    s.
    b.3y ears d.4. 5y ears Discountr atesfora16%r ateareasfoll
    ows:
    PresentVal ueof$1 Pr esentVal ueofanOr di
    nar yAnnui t
    y
    *
    . Thenetpresentv
    aluei
    s(E) of$1
    a.P57,308.40 d.P237,308.40 Year1 .
    862 .
    862
    b.P90,000 e. Noneofthethese Year2 .
    743 1.605
    c. P180,
    000 Year3 .
    641 2.246

    Questi
    ons66and67ar ebasedont hefoll
    owinginformati
    on.CMA 1293 4- 18 & cci
    v. Whati
    sthenetpr
    esentv
    alueoft
    hispr
    oject
    ?
    19 a.$3,
    278 c. $(
    568)
    TheKeegoCompanyi splanninga$200, 000equipmenti nvestmentwhichhasan b.$5,
    842 d.$30,910
    esti
    mated 5-yearli
    fe wit
    h no est imated salv
    age v al
    ue. The companyhas
    proj
    ect
    edt hefoll
    owi
    ngannual cashflowsfortheinvestment. ccv
    . Thepay backper
    iodf
    ort
    hisi
    nvest
    mentwoul
    dbe
    Year ProjectedCashI nfl
    ows PresentVal
    ueof$1 a.1.88y
    ears. d.2.23y
    ear
    s.
    1 $120,000 .
    91 b.3.00y
    ears. e. 1.
    62y
    ear
    s.
    2 60,000 .
    76 c. 2.
    23y
    ears.
    3 40,000 .
    63
    4 40,000 .
    53 Quest i
    ons78and79ar ebasedont hef ol
    l
    owinginf
    ormation. CMA12954- 12&
    5 40,000 .
    44 13
    Total
    s $300,000 3.27 Will
    isInc.hasacostofcapi talof15%andi sconsi
    deri
    ngt heacqui
    sit
    ionofanew
    machi newhichcosts$400, 000andhasausef ulli
    feof5y ear
    s.Wi l
    li
    sproj
    ect
    s
    cci
    i
    . Assumi ngthatt
    heesti
    matedcashinf
    lowsoccurevenl
    ydur
    ingeachy
    ear
    , thatearni
    ngsandcashf l
    owwi lli
    ncreaseasfol
    lows:
    thepay
    backperi
    odfort
    heinv
    est
    mentis Year NetEar nings Aft
    er-
    TaxCashFl ow
    a.1.67year
    s. c. 2.
    50years. 1 $100,000 $160, 000
    b.4.91year
    s. d.1.96years. 2 100,000 140,000
    3 100,000 100,000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page74of74
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    4 100,
    000 100,
    000 a.$20,
    400. c. $80,
    000.
    5 200,
    000 100,
    000 b.$28,
    400. d.$50,000.

    15%I
    nter
    estRat
    eFact
    ors Payback, Pr
    esentVal ueofCashFl ow,Prof
    itabil
    i
    t yI
    ndex
    Quest i
    ons8t hrough10arebasedont hefollowinginformati
    on. RPCPA1079
    Per
    iod Pr
    esentVal
    ueof$1 Pr
    esentVal
    ueofanAnnui
    tyof$1 CaloocanManuf acturi
    ngCo.whi chhasa14% costofcapi t
    al,i
    spl anni
    nga
    1 0.87 0.
    87 proj
    ectt hatwi l
    lcostP80, 000. Theannualcashi nflow,netofincomet axes,
    2 0.76 1.
    63 togetherwiththepresentv al
    uefactor
    s(14%)ar easf ollows:
    3 0.66 2.
    29 Year CashFl ow PresentVal ueofP1at14%
    4 0.57 2.
    86 1 P16,000 0.877
    5 0.50 3.
    36 2 P32,000 0.769
    3 P32,000 0.675
    ccv
    i. Thenetpresentv
    alueoft
    hisi
    nvest
    mentis 4 P48,000 0.592
    a.Negat
    ive,
    $64,000 c. Posi
    ti
    ve,
    $18,
    600 *. Thepr esentv al
    ueofthecashf lowgeneratedbyt hepr oj
    ecti
    s(E)
    b.Negat
    ive,
    $14,000 d.Positi
    ve,
    $200,
    000 a.P88, 656 c. P91,456
    b.P90, 056 d.P92, 856
    ccv
    ii. Whati
    sthepay
    backper
    iodoft
    hisi
    nvest
    ment?
    a.1.50year
    s. c. 3.
    33years. *
    . Theprof
    it
    abi
    l
    ityi
    ndexoft
    hepr
    oject(
    roundedtot
    henear
    esthundr
    edt
    h)i
    s(E)
    b.3.00year
    s. d.4.00years. a.1.02 c. 1.
    10
    b.1.07 d.1.15
    Questi
    ons83&84ar ebasedonthef ol
    lowinginf
    ormati
    on. AICPAadapt ed
    (
    Ignoreincomet axesi nthi
    sprobl
    em. )ApexCor p.i
    splanningt obuypr oduction *
    . Pay
    backperi
    odf
    ort
    hepr
    ojecti
    s(E)
    machinerycosti
    ng$100, 000.Thi
    smachi nery'
    sexpectedusef ulli
    feisf i
    vey ears, a.2.75year
    s c. 3.
    5y ear
    s
    wit
    hnor esidualvalue.Apexusesadi scountrat
    eof10%andhascal culat
    edt he b.3y ear
    s d.4y ears.
    fol
    l
    owingdat apertaini
    ngtothepurchaseandoper at
    ionofthismachi nery:
    Year Esti
    matedannual netcashi nfl
    ow Pay
    back,
    NPV&Annual
    CashI
    nfl
    ow
    1 $60,000 Quest
    ions1t
    hru3ar
    ebasedont
    hef
    oll
    owi
    ngi
    nfor
    mat
    ion.
    2 30,000 JamesCor porati
    onisconsider
    ingani nvestmentinequipmentf or$50,000.Data
    3 20,000 rel
    atedtotheinvestmentareasfoll
    ows:
    4 20,000 Year IncomeBefor eDepreciat
    ionand
    5 20,000 Taxes
    1 $25, 000
    83.Thepaybackperi
    odi
    s:(
    E) 2 25,000
    a.2.50years. c. 3.
    00y
    ear
    s. 3 25,000
    b.2.75years. d.5.00y
    ear
    s. 4 25,000
    Jamesusest hest r
    aight
    -l
    inemethodofdepr eci
    ati
    onwi thnomi d-y
    earconv enti
    on.
    84.Thenetpr
    esentv
    aluei
    scl
    osestt
    o:(
    E) I
    naddi t
    ion,t
    heirtaxrateis40percentandt hel
    ifeoftheequi pmentisfoury ear
    s
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page75of75
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    wi
    thnosal
    vagev
    alue.Costofcapi
    tal
    is12per
    cent
    .
    ccxi
    i. Whati
    sthepr
    ofi
    tabi
    l
    ityi
    ndexf
    ort
    hei
    nv est
    ment
    ?
    ccv
    ii
    i
    . Whati
    sthepay
    backper
    iodi
    nyear
    sapproxi
    mat
    edt
    otwodeci
    mal
    poi
    nts? a.0.05 c. 1.05
    a.2.00 d.2.50 b.0.96 d.1. 25
    b.0.40 e. 0.
    50
    c. 3.
    33 H&M ccxi
    ii
    .Whati
    sthepay
    backper
    iodoft
    hisi
    nvest
    ment?
    a.1.
    5year
    s. c. 3.
    3year
    s.
    cci
    x
    .
    Whati
    sthenetpr
    esentv
    alueoft
    hei
    nvest
    ment? b.3.
    0year
    s. d.4.0year
    s.
    a.$60,
    740 c. $25,
    925
    b.$(4,
    445) d.$10,740 H&M Questions102t hrough105ar ebasedont hefoll
    owingi nf
    ormat i
    on. Gleim
    MSTr ucki ngisconsi deri
    ngthepur chaseofanewpi eceofequi pmentt hathasa
    ccx
    .Whati
    stheannual
    netcashi
    nfl
    owf
    ory
    ear1? netiniti
    ali nvestmentwi thapr esentv aleof$300, 000.Theequi pmenthasan
    a.$20,
    000 c. $25,
    000 esti
    mat edusef ulli
    f eof3y ears.Fort axpur poses,t heequi pmentwi llbef ull
    y
    b.$15,
    000 d.$5,000 H&M depreciated atr at es of30%,40%,and 30%,i ny ears one,t wo,and t hree,
    respectiv
    el y.Thenewmachi neisexpect edtohav ea$20, 000salvagev alue.The
    Payback, NPV&PI machine i s expect ed to sav et he company$170, 000 pery eari n oper ati
    ng
    Questions80t hrough82arebasedont hef ol
    lowinginformation. Glei
    m expenses.MSTr ucki nghasa40%mar gi
    nalincomet axr at
    eanda1^ %costof
    Tonya,Inc.hasacostofcapi t
    alof15%andi sconsideringt heacquisi
    ti
    onofa capit
    al.Di scountr atesf ora16%r atear e:
    new machi net hatcosts$800, 000andhasausef ullifeof5y ears. Tonya PresentVal ueofanOr dinar
    yAnnuity Pr esentValueof
    proj
    ectsthatear ningsandcashf l
    owwi ll
    increaseasf oll
    ows: of$1 $1
    Year NetEar nings After
    -TaxCashFl ow Year1 0. 862 0.
    862
    1 $200, 000 $320,000 Year2 1. 605 0.
    743
    2 200, 000 280,000 Year3 2. 246 0.
    641
    3 200, 000 200,000
    4 200, 000 200,000 ccxi
    v.Whatist
    henetpr
    esentv
    alueoft
    hispr
    oject
    ?
    5 200, 000 200,000 a.$31,
    684 c. $94,
    640
    I
    nterestratef actorsat15%ar easf oll
    ows: b.$26,
    556 d.$18,864
    Per i
    od PresentValueof$1 PresentValueofanAnnui ty
    1 0.87 0.87 ccxv. Whati
    sthepr
    ofi
    tabi
    l
    ityi
    ndexf
    ort
    heproj
    ect
    ?
    2 0.76 1.63 a.1.089 c. 1.
    315
    3 0.66 2.29 b.1.106 d.1.063
    4 0.57 2.86
    5 0.50 3.36 ccxvi
    .Thepaybackper
    iodf
    ort
    hisi
    nvest
    mentis
    a.2.
    84years. c. 2.
    08y
    ear
    s.
    ccxi
    . Thenetpr esentv
    alueoft
    hisi
    nvest
    mentis b.1.
    76years. d.3.00y
    ear
    s
    a.$(128,000) c. $37,
    200
    b.$200,000 d.$400,000 ccxv
    ii
    .Assumet
    hesamef
    act
    sasabov
    e,exceptt
    hatt
    hesal
    vagev
    alueatt
    he

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page76of76
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    endoft
    heinvest
    ment
    ’susef
    ull
    i
    fei
    szero.Whati
    sthenewpay
    backper
    iod? *
    . Rat
    eofall
    inv
    estmentcomput
    edf
    orPr
    oposal
    M andPr
    oposal
    N,r
    espect
    ivel
    y:
    a.2.84year
    s. c. 2.
    08year
    s. a.8.2%and8.3% c. 16.
    4%and17.4%
    b.1.76year
    s. d.2.09year
    s. b.15.7%and16.7% d.18.6%and18.6%

    ExpectedAnnual CostSav i
    ngs&I RR *
    . Pay
    backper
    iod
    Questions86and87ar ebasedont hefoll
    owinginfor
    mation. Bar f
    ield a.3.0f
    orM and3.
    5forN c. 5.
    0forM and6.
    0forN
    TheAl lendaleCo.hasr ecent
    lyev aluatedapr oposaltoinv
    estincost-r
    educing b.3.7f
    orM and4.
    0forN d.12.2forM and12.
    0forN
    productiont echnol
    ogy.Accordingt otheev al
    uati
    on,theproj
    ectwouldrequirean
    i
    niti
    alinv estmentof$17, 166andwoul dprovi
    deequalannualcostsav ingsf or *
    . Netpresentval
    uedi
    scount
    edatanannualr ateof12% ofpr
    oposalNifthe
    fi
    vey ears.Basedona10per centdi scountrate,theproj
    ectgenerat
    esanet pr
    esentvaluetober
    ecei
    vedfor5per
    iodsis3.605andf
    or6periods4.
    111.
    presentv alueof$1,788.Theprojecti snotexpectedtohaveanysalvagev al
    ueat a.P3,940 c. P13,320
    theendofi tsfi
    ve-y
    earli
    fe. b.P7,880 d.P26, 640

    86.(Presentv al
    ue t
    abl
    es needed to answert hi
    s quest
    ion.
    )Whatar
    ethe Questi
    ons81t hrough83ar ebasedont hefol
    lowi
    ngi
    nfor
    mation. Bar
    fi
    eld
    expectedannual
    costsavi
    ngsoftheproject? Heft
    yInvestmentCo.i sconsi deri
    ngani nvest
    menti
    nal abor-
    savingmachine.
    a.$3, 500 c. $4,
    500 I
    nformati
    onont hismachi nefollows:
    b.$4, 000 d.$5,000 Cost $30,000
    Sal
    vagev al
    uei nfi
    v eyears $0
    87.(Presentval
    uetablesneededtoanswert
    hisquest
    ion.
    )Whati
    sthepr
    oject
    's Esti
    matedlife 5y ears
    expectedi
    nter
    nalrateofret
    urn? Annualdepreciat
    ion $6,
    000
    a.10% c. 13% Annualreducti
    oni nexisti
    ngcost s $8,
    000
    b.11% d.14%
    81.(Presentval
    uetabl
    esneededtoanswerthisquestion.
    )Whati
    sthei
    nter
    nal
    Pay backPeriod,NPV&I RR rat
    eofr et
    urnonthi
    spr
    oject(
    roundt
    othenear est1/
    2%)?
    Quest i
    ons14t hrough16ar ebasedont hefollowi
    nginformation. RPCPA1085 a.37. 5% c. 10.5%
    Bernie Co.ev aluates 2 al t
    ernat
    ivei nvestment opportunit
    ies. Al lcapital b.25. 0% d.13. 5%
    i
    nv estmentinthiscompanyar eexpectedt oyiel
    dadi scountrateofret
    urnofless
    than12%.Thef ollowingdat aonthe2inv estmentproposalsare: 82.(Presentv al
    uetablesneeded t
    o answert hi
    squestion.
    )Assumeforthi
    s
    ProposalM ProposalN quest i
    ononlythatHeft
    yCo.usesadi scountrateof16percentt
    oeval
    uat
    e
    Requir
    edinvest ment P 440,
    000 P 480,
    000 projectsofthi
    stype.Whati
    stheproj
    ect'
    snetpresentv
    alue?
    Esti
    matedser vicelife 5year
    s 6year
    s a.$( 6,
    283) c. $(
    23,451)
    Esti
    matedsal vagev alue P 20,000 - b.$( 3,
    806) d.$(22,000)
    Esti
    mated annual cash 170,
    000 P 120,
    000
    fl
    ow 83.Whatisthepaybackper
    iodont
    hisi
    nvest
    ment ?
    Depreci
    ati
    onst raight-l
    ine 84,
    000 80,
    000 a.4y ears c. 3.
    75y ear
    s
    Esti
    matedannual income 36,
    000 40,
    000 b.2.14y ear
    s d.5y ears

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page77of77
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Payback, NPV, I
    RR&CashFl ows D $30,
    000 $20,
    000 Unknown $20,
    000
    Questions1t hru3ar ebasedont hefol
    lowinginfor
    mat
    ion. H&M
    78.FrankDr ewerisconsi deri
    ngthepurchaseofacomputer-ai
    dedmanuf actur
    ing Addi
    ti
    onal
    inf
    ormat
    ion:
    system.Theaf t
    er-taxcashbenefit
    s/savi
    ngsassociat
    edwi tht
    hesy stem are Pr
    esentVal
    ueof$1 PresentVal
    ueofan
    asf ol
    lows: Di
    scount Number DueattheEndofn Annuityof$1perPeri
    od
    Decr easedwast e $150,
    000 Rate of Per
    iods(
    PVIP) fornPer i
    ods(PVI
    FA)
    I
    ncr easedqual i
    ty 200,
    000 Per
    iods
    Decr easeinoper ati
    ngcosts 300,
    000 5% 1 0.
    9524 0.
    9524
    I
    ncr easeinon- t
    imedel i
    veri
    es 100,
    000 5% 2 0.
    9070 1.
    8594
    Thesy stem willcost$4,500,000andwi l
    llastt
    enyears.Thecompany ’scost 5% 3 0.
    8638 2.
    7232
    ofcapi talis12per cent. 10% 1 0.
    9091 0.
    9091
    10% 2 0.
    8264 1.
    7355
    ccxv
    ii
    i
    . Whatisthepay
    backper
    iodf
    ort
    hecomputer
    -aidedmanuf
    act
    uri
    ngsy
    stem? 10% 3 0.
    7513 2.
    4869
    a.10.00year
    s d.6.92y ears 15% 1 0.
    8696 0.
    8696
    b.15.00year
    s e. 6.
    00y ears 15% 2 0.
    7561 1.
    6257
    c. 11.
    25year
    s 15% 3 0.
    6575 2.
    2832
    ccxi
    x
    . Whati st heNPVf
    ort
    hecomput
    er-
    aidedmanufact
    uri
    ngsy
    stem? ccxxi
    .IfProj
    ectAhasani
    nter
    nal
    rat
    eofr
    etur
    n(IRR)of15%,
    ithasacostof
    a.$4,500,000 d.$4,237,
    500 a.$8,696 c. $24,869
    b.$(262,500) e. $3,
    000,
    000 b.$22,832 d.$27, 232
    c. $(
    2,805,000)
    ccxx
    ccxxi
    i
    .Ift
    hedi
    scountr
    atei
    s10%,
    thenetpresentval
    ue(
    NPV)ofPr
    ojectBi
    s
    .
    Whichoft
    hefol
    l
    owingbestdescr
    ibest
    heIRRf orthi
    spr
    oject
    ? a.$4,
    079 c. $9,
    869
    a.between8and10percent d.bet ween14and16per
    cent b.$6,
    789 d.$39,204
    b.between10and12percent e. abov e16per
    cent.
    c. bet
    ween12and14percent ccxxi
    i
    i.Thepaybackper
    iodofPr
    ojectCi
    s
    a.0y ear
    s c. 2y
    ear
    s.
    Questi
    ons114t hr
    ough117ar ebasedonthef ol
    l
    owinginfor
    mat i
    on.CIA 1195I
    V- b.1y ear
    . d.3year
    s.
    38to41
    Anor ganizat
    ionhasf ouri
    nvestmentproposalswiththef ol
    lowingcostsand ccxxiv
    .Ifthedi
    scountrat
    eis5%andthediscount
    edpaybackperi
    odofPr
    ojectD
    expectedcashinf
    lows: isexactl
    y2y ear
    s,t
    henthey
    ear2cashinfl
    owforPr
    ojectDis
    Expect
    edCashI nfl
    ows a.$5, 890 c. $12,
    075
    Project Cost EndofYear EndofYear EndofYear b.$10, 000 d.$14,301
    1 2 3
    A Unknown $10,
    000 $10,
    000 $10,
    000 Quest
    ions113t
    hrough116arebasedonthefol
    lowingi
    nfor
    mat
    ion.CI
    A 0595I
    V-
    B $20,
    000 $5,000 $10,
    000 $15,
    000 41to44
    C $25,
    000 $15,
    000 $10,
    000 $5,000 Acompanyiseval
    uati
    ngthr
    eeinvest
    mentproj
    ects.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page78of78
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Proj
    ectAcost s$100, 000,hasa10%costofcapi tal
    ,andhasequalend- of-
    period paybackper
    iodf
    or<ListA>is<Li
    stB>year
    (s)
    .
    cashinfl
    owseachy earforfi
    veyears. A. B. C. D.
    Proj
    ectBcosts$50, 000andhasequalend- of-
    per
    iodcashinfl
    owsof$40, 000per Li
    stA Pr
    ojectB Proj
    ectB Pr
    ojectC Pr
    ojectC
    yearfort
    woy ears. Li
    stB One Two One Two
    Proj
    ectCcost s$60, 000andhascashi nflowsof$20,000attheendofy earone,
    $35,000attheendofy eartwo,andanunknowncashi nf
    low attheendofy ear Quest ions24t hru29ar ebasedont hefollowinginformat i
    on. Gi t
    man
    thr
    ee. Nuf fFol dingBoxCompany ,Inc.i sconsideringpurchasi nganewgl uingmachi ne.
    Number DiscountRat e Pr
    esentValueof$1Due Pr esentValueof$1per Thegl uingmachi necost s$50, 000andr equiresinstal
    lationcost sof$2, 500.Thi s
    ofYear
    s ( Percent) att heendofnPer i
    ods Per i
    odfornPer i
    ods outlaywoul dbepar t
    iall
    yof fsetbyt hesal eofanexi stinggl uer.Theexi sti
    nggl uer
    (
    PVI F) (
    PVI FA) ori
    gi nallycost$10, 000andi sf oury earsol d. Itisbei ngdepr eciatedunder
    1 10 0.9091 0.9091 MACRSusi ngaf i
    v eyearr ecov eryschedul eandcancur rent l
    ybesoldf or$15, 000.
    1 12 0.8929 0.8929 Theexi stinggl uerhasar emai ningusef ullif
    eoff iv
    ey ear s.Ifhelduntilyear5, the
    2 10 0.8264 1.7355 existingmachi ne'smar ketv aluewoul dbezer o.Ov eri tsfiveyearlife,thenew
    2 12 0.7972 1.6901 machi neshoul dr educeoper atingcost s( excludi
    ngdepr eciat
    ion)by$17, 000per
    3 10 0.7513 2.4869 year.Tr ainingcost sofempl oy eeswhowi l
    loperatet henew machi newi llbea
    3 12 0.7118 2.4018 onet i
    mecostof$5, 000whi chshoul dbei ncludedint hei nit
    ialoutl
    ay.Thenew
    4 10 0.683 3.1699 machi newi llbedepr eci
    atedunderMACRSusi ngaf iv
    ey earrecoveryper i
    od.The
    4 12 0.6355 3.0373 fi
    rm hasa12per centcostofcapi talanda40per centt axonor di
    naryincomeand
    5 10 0.6209 3.7908 capital gains.
    5 12 0.5674 3.6048
    24.Thepaybackper
    iodf
    ort
    hepr
    ojecti
    s
    ccxxv.I
    fthenetpresentval
    ueofProj
    ectAis$12,405,thent
    hesi
    zeofeach A.2y ear
    s. C.bet
    ween3and4y
    ear
    s.
    equal
    ,end-
    of-
    per
    iodcashi
    nfl
    ow,
    tothenear
    estdoll
    ar,
    is B.3y ear
    s. D.bet
    ween4and5y
    ear
    s.
    A.$19,979 C.$29,652
    B.$21,863 D.$31,182 25.Thet
    axeff
    ectofthesal
    eoftheexi
    sti
    ngasseti
    s
    A.ataxl
    iabi
    li
    tyof$2,
    340. C.at axl
    iabi
    l
    ityof$3,
    320.
    ccxxvi
    .Ifthecostofcapi
    tali
    s12%,t
    henetpr
    esentval
    ueofPr
    ojectB,t
    othe B.ataxbenef
    itof$1,
    500. D.at axl
    iabi
    l
    ityof$5,
    320.
    nearestdol
    l
    ar,i
    s
    A.( $18,
    112) C.$17,604 26.Thei
    nit
    ialout
    layf
    ort
    hispr
    ojecti
    s
    B.( $16,
    944) D.$19,420 A.$42,820. C.$47,
    820.
    B.$40,320. D.$35,
    140.
    ccxxvi
    i.
    IfPr
    ojectChasani nter
    nalr
    ateofret
    urnof12%,t
    hent
    hecashi
    nfl
    owat
    theendofy eart
    hree,
    tothenear
    estdol
    lar
    ,is 27.Thepr
    esentval
    ueoft
    hepr
    oject
    'sannual
    cashfl
    owsi s
    A.$17,162 C.$24,126 A.$47,820. C.$51,694.
    B.$20,006 D.$24,981 B.$42,820. D.$100,563.

    ccxxv
    ii
    i. I
    fthey
    eart
    hreecashi
    nfl
    ow f
    orPr
    ojectC i
    s$46,
    000,t
    hent
    he 28.Thenetpr
    esentv
    alueoft
    hepr
    ojecti
    s

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page79of79
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    A.$3,
    874. C.$5,
    614.
    B.$2,
    445. D.$7,
    500.

    29.Thei
    nter
    nalr
    ateofr
    etur
    nforthepr
    ojecti
    s
    A.between7and8percent. C.great
    erthan12per
    cent.
    B.between9and10percent. D.between10and11percent
    .

    Payback, NPV, I
    RR&I nvest mentDeci si
    on
    Questi
    ons109t hrough112ar ebasedont hef ol
    lowi ngi nformati
    on.CIA1194I V-
    31to33
    Acompanyi sev aluati
    ngt woi nvestmentpr oposal s.Pr ojectAcost s$700,000
    andProj ectBcost s$500, 000.
    Expectedcashi nflowsf ort het wopr ojectsar easf oll
    ows:
    Year CashI nflowatEndofYearf or CashI nfl
    owatEndofYearf or
    ProjectA ProjectB
    1 $400, 000 $250,000
    2 $300, 000 $250,000
    3 $600, 000 $250,000
    Bothproj ectsareassessedasbei ngequal lyriskyandhav inganappropri
    atecost
    ofcapital of10%.
    Fora10%costofcapi t
    al,thef ollowingpr esentv aluef actorsapply:
    Number Pr esentVal ueof$1 PresentVal ueofanAnnui tyof$1
    ofYear s Recei v
    edatEndofYear Recei vedatEndofEachYearf orn
    n[PVI F] Year s[PVIFA]
    1 .
    9091 .
    9091
    2 .
    8264 1.
    7355
    3 .
    7513 2.
    4873
    Fora3- yearannui ty,thefol l
    owi ngpr esentv aluef actorsappl y:
    Di scountRat e PresentVal ueofa3- YearAnnui t
    yof$1(PVIFA)
    16percent 2.2459
    20percent 2.1065
    24percent 1.9813
    28percent 1.8684

    ccxxi
    x.Pr
    ojectAhasapaybackper
    iodof
    A.0y ears. C.2y
    ear
    s.
    B.1y ear. D.3y
    ear
    s. CI
    A1194I
    V-31
    CMAEXAMI NATIONQUESTIONS Page80of80
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ccxxx. Pr oj
    ectAhasanetpr
    esentval
    ue(
    tot
    henear
    estdol
    l
    ar)of Af i
    rm withan18% costofcapi tali
    sconsideringthefoll
    owi
    ngpr oject
    s(on
    A.$362,340 C.$1,
    676,
    670 Januar
    y1, year1)
    :
    B.$1,062,
    340 D.$2,
    376,
    670 CI
    A1194I
    V- January1,Year1 December31, Year5
    32 CashOut fl
    ow CashI nfl
    ow Proj
    ect
    (
    000’sOmi t
    ted) (
    000’
    sOmi tt
    ed) I
    nternal
    ccxxxi
    .Whichofthefoll
    owi
    ngmostcl
    osel
    yapprox
    imat
    est
    hei
    nter
    nalr
    ateof Rateof
    ret
    urnofPr
    ojectB? Return
    A.16% C.24% Pr
    ojectA $3,500 $7,400 16%
    B.20% D.28% CI
    A1194IV- Pr
    ojectB 4,000 9,950 ?
    33
    PresentVal
    ueof$1dueattheEndof“N”Per
    iods
    ccxxxi
    i
    . Ifproject
    sAandBar
    eindependent
    ,thecompanywi
    l
    lundert
    ake
    N 12% 14% 15% 16% 18% 20% 22%
    A.Bot
    hpr
    ojects. C.OnlyProjectB.
    4 .
    6355 .
    5921 .
    5718 .
    5523 .5153 .
    4823 .
    4230
    B.Onl
    yPr
    ojectA. D.Neitherproj
    ect
    . CI A1194IV-
    34
    5 .
    5674 .
    5194 .
    4972 .
    4761 .4371 .
    4019 .
    3411
    6 .
    5066 .
    4556 .
    4323 .
    4104 .3704 .
    3349 .
    2751
    NPV&I RR
    Quest i
    ons78&79ar ebasedont hef ol
    lowinginformat i
    on. G&N9e
    (Ignoreincomet axesi nt hisprobl em. )TreadsCor por
    ationisconsideringt he ccxxxi
    i
    i. Usingt
    henet
    -pr
    esent
    -val
    ue(NPV)method,
    proj
    ectA’
    snetpr
    esent
    replacementofanol dmachi net hati scurrentl
    ybei ngused.Theol dmachi neis val
    ueis
    full
    ydepreciatedbutcanbeusedbyt hecor porati
    onf orf i
    vemor ey ears.If a.$316,920 c. $(
    265,
    460)
    Treadsdeci dest or eplacet heol d machi ne,Pi cco Companyhasof fered to b.$23,140 d.$(316,
    920)
    purchasetheol dmachi nef or$60,000.Theol dmachi newoul dhav enosal vage
    valueinfi
    vey ears. ccxxxi
    v. Pr
    ojectB’
    sint
    ernal
    rat
    eofr
    etur
    ni scl
    osedt
    o
    Thenew machi newoul dbeacqui redf rom Hill
    crestIndustri
    esf or$1,
    000,000i n a.15% c. 18%
    cash.Thenewmachi nehasanexpect edusef ulli
    feoff i
    vey earswithnosal vage b.16% d.20%
    value.Duet ot hei ncreasedef f
    ici
    encyoft henew machi ne,estimatedannual
    cashsav i
    ngsof$300, 000woul dbegener at
    ed. Questi
    ons14and15ar ebasedonthefol
    lowinginfor
    mat i
    on. RPCPA0581
    TreadsCorpor ati
    onusesadi scountr ateof12%. V.Ortega,Inc.isev aluat
    ingtwoalter
    nat
    iveinvestmentpr oposals,X&Y.Each
    proj
    ecthasest i
    mat edl if
    eoftenyears.Allcapitali
    nvestment sinthi
    scompany
    78.Thenetpresentv
    alueoft
    hepr
    ojecti
    sclosestt
    o:(M) areexpectedtoy iel
    dadi scount
    edrateofretur
    nofnotl esst han15%.Addit
    ional
    a.$171,000. c. $141,
    500. i
    nformationont het wopr oj
    ect
    sandapr esentv al
    ue( PresentValuetabl
    eare
    b.$136,400. d.$560,000. shownbel ow.)
    Proj
    ectX Proj
    ectY
    79.Thei
    nter
    nal
    rat
    eofr
    etur
    noft
    hepr
    ojecti
    sclosestt
    o:(
    M) Netinvestment P60,000 P135,000
    a.14%. c. 18%. Annualr eturnf oreach of10 P16,295 P 32,204
    b.16%. d.20%. years

    Quest
    ions89and90ar
    ebasedont
    hef
    oll
    owi
    ngi
    nfor
    mat
    ion.CI
    A0597I
    V-40&41 Pr
    esentVal
    ueofP1Recei
    vedAnnual
    l
    yfor10y
    ear
    s
    CMAEXAMI NATIONQUESTI
    ONS Page81of81
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nt.Rat
    e Pr
    esentVal
    ue I
    nt.Rat
    e Present per
    cent
    agepoi
    nti
    s
    Value a.10% c. 25%
    12% 5.
    650 20% 4.
    192 b.15% d.100%
    14% 5.
    216 22% 3.
    923
    15% 5.
    019 24% 3.
    682 ccxxxvi
    i
    . Netpr esentvalue(NPV)andi nt
    ernalrateofr etur
    n( I
    RR)di f
    ferin
    16% 4.
    833 25% 3.
    571 that
    18% 4.
    494 26% 3.
    465 a.NPVassumesr ei
    nvestmentofpr ojectcashf l
    owsatt hecostofcapi tal
    ,
    wher easIRRassumesr ei
    nvestmentofpr ojectcashf l
    owsatt heinter
    nal
    *
    . Thediscount
    edr
    ateofr
    etur
    nforeachoft
    het
    woproject
    sar
    e:(
    M) rateofr et
    urn.
    a. b. c. d. b.NPVandI RRmakedi ffer
    entacceptorr ejectdeci si
    onsf orindependent
    Pr
    ojectX 14% 22% 24% 24% projects.
    Pr
    ojectY 18% 25% 20% 24% c. IRRcanbeusedt or ankmut ual
    lyexclusi
    vei nvestmentprojects,butNPV
    cannot .
    *
    . Basedont heminimum rateofretur
    nrequi
    rementof15%,thenetorexcess d.NPVi sexpr essedasaper centage,whileI RRi sexpressedasadol l
    ar
    presentval
    ueofretur
    nsforeachofthetwoproj
    ectsar
    e(E) amount .
    a. b. c. d.
    NetI ncome,I ncr ement alCashI nfl
    ow,Pay backPer i
    od& Di scount edRat eof
    ProjectX P16,295 P21,785 P 81,
    785 P102,
    950 Ret
    ur n
    ProjectY P32,204 P26,632 P161,
    632 P187,
    040 *. Thecomposi tel i
    feoft hecompany ’
    sf ixedasset swasdet er minedt obeni ne
    yearsatt heendof1993.One- tenthoft he1993bal anceist henetbookv al
    ue
    Quest ions111t hrough113ar ebasedont hefol
    lowinginfor
    mat i
    on.CIA 0594I V- ofanequi pmentl i
    neusedf orbot tl
    ingoper ati
    ons.Ani nvest mentoppor tunit
    y
    40t o42 torepl acet hisl i
    newaspr esent edint hebegi nningof1994wi t
    ht hef oll
    owing
    A company t hatannual l
    yr evi
    ews it
    si nvest
    mentoppor tuniti
    es and selects additional data:
    appr opriatecapitalexpenditur
    esfort hecomi ng yeari spr esented wit
    ht wo  Di sposal val ueofol dl ineisequal toi t
    snetbookv alue.
    projects,called Pr oj
    ectA and ProjectB. Bestest i
    mat esi ndicatethatt he  Costofnew l ineincl usiveofci vilwor ks,inst all
    ationandcommi ssi
    oning
    i
    nv estmentout l
    ayf orProj
    ectAi s$30,000andf orProjectBi s$1mi ll
    i
    on.The costs, P35,000.Est imat edusef ulli
    fei s15y ears.
    projectsar econsi deredtobeequallyrisky
    .Pr ojectAi sexpect edt ogenerate  I mmedi ater epai r
    sneededonol dl i
    nei sP1, 000
    cashi nflowsof$40, 000att heendofeachy earfor2y ear s. Proj
    ectB i s  I ncomet axr atei s35%
    expect edt ogener atecashinfl
    owsof$700, 000att heendoft hef ir
    styearand  Annual out-of-pocketoper atingcost s:oldline,P9, 000; newl ine,P3, 000
    $500, 000attheendoft hesecondyear.Thecompanyhasacostofcapi talof8%.  Thet ableofpr esentv aluesi ncludet hef oll
    owi ng:
    14% 16% 18% 20%
    ccxxxv. Whati
    st henetpresentvalue( NPV)ofeachprojectwhent hecost
    PresentVal ue ofP1 due 15 0. 140 0.108 0.084 0.065
    ofcapi
    tal
    iszero?
    year s
    a. b. c. d. PresentVal ueofP1r ecei v
    ed
    Proj
    ectA $30,000 $50,000 $80,000 $110,000 annual l
    yf or15y ear s 6.142 5.575 5.092 4.675
    Proj
    ectB $1,000,000 $200, 000 $1,
    200,000 $2,200,000 Deter minet heneti nv estment( NI),increment alcashi nf low (CI ),payback
    period( PP) ,andt hedi scount edr ateofr eturn( DRR)oft henewi nv est
    ment .
    ccxxxv
    i. The i
    nter
    nalrat
    e ofr
    etur
    n ofPr
    ojectA,t
    othe near
    estf
    ull
    CMAEXAMINATIONQUESTIONS Page82of82
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    (
    D)
    a. b. c. d. *
    . Thetotal
    oft
    hecost
    sir
    rel
    evantt
    othedeci
    sionis
    NI P25,114,40 P25,764.40 P24,764.40 P25,414. 40 a.P9,000 d.P800
    CI P4,343. 89 P3,075. 63 P4,343. 89 P4,343. 89 b.P1,000 e. noneoft
    hese
    PP 4.5y ears 8.4y ears 5.7y ears 5.9y ears c. P900
    DRR 22.22% 11.91% 15.56% 16.95%
    *
    . Thenetpr
    esentv
    alueoft
    heowner
    shi
    palt
    ernat
    ivei
    s
    Inv
    estmentDeci sions a.P9,000 c. P5,
    445
    Questions1t hrough5ar ebasedont hef ollowingi nf
    ormati
    on. RPCPA1076 b.P1,000 d.P4,609
    YOU ar et he managementadv iserofMasugi d Company ,a management
    company .I tispr esentlyconsi deringtheput t
    inginofcertai
    nconcessi onsinthe *
    . Thet
    otaloft
    heper
    ti
    nentcost
    sthatent
    eredyourcashf
    lowconsi
    der
    ati
    onsi
    s
    mainl obbyofanof ficebui ldingwhi chitmanages.Yourst udybr oughtoutt he a.P4,609 c. P47,
    300
    fol
    lowingest i
    mat esonanav erageannual basi s. b.P49,200 d.P9,200
    Salaries P 7,000
    Licencesandt axes 200 Opt imal ProjectSel ection
    ccxxxv
    iii
    Costofmer chandi sesol d 40,000 .Jackson Cor por at
    ion is ev aluat i
    ng t he f ol
    lowing f our i
    ndependent ,
    Shareofai rcondi t
    ioningandl i
    ght 500 inv estmentoppor tuniti
    es:
    Pr oratabuildingdepr eciation 1,000 Project Cost RateofRet urn
    Concessi onadv erti
    sing 100 A $300, 000 14%
    Shareofcompanyadmi nist r
    ativecost s 400 B 150,000 10
    Saleofmer chandi se 49,000 C 200,000 13
    Thei nvestmenti nequi pment ,whi chwoul dl ast10y ears(nosal vagev al
    ue) D 400,000 11
    wouldbeP5, 000.Asanal t
    ernat i
    ve,acat eringcompanyhasof feredt oleasefor Jackson’ st argetcapi t
    alstructureis60per centdebtand40per centequi ty
    .
    P750pery ear,f
    or10y ears, andt oputi nandoper at
    ebytheof f
    icebui ldi
    ngatno They i
    eldt omat urityont hecompany ’
    sdebti s10per cent.Jacksonwi l
    lincur
    addit
    ionalchar ge. I nf ormul ati
    ng y ouradv i
    ce tot he managementoft he f l
    ot ationcost sf oranewequi tyissuanceof12per cent.Thegr owthr atei sa
    company , youdet erminet hat : const ant6per cent .Thest ockpr i
    cei scur rent l
    y$35pershar eforeachoft he
    *. Theannualcashf l
    ow whi chy ouconsi dert heincr
    ementaladv antagei nthe 10, 000shar esout standing.Jacksonexpect st oearnneti ncomeof$100, 000
    owner shipalternat i
    veis t hiscomi ngy earandt hedi vi
    dendpay outr at
    iowi l
    lbe50per cent.I fthe
    a.P1, 700 c. P1, 900 company ’staxr atei s30per cent,whi choft hepr oj
    ectswi l
    lbeaccept ed?( M)
    b.P750 d.P9, 000 a.Pr ojectA
    b.Pr ojectsAandC
    *
    . UsingthePresentVal
    ueTabl efor10y ears(theper i
    odoftheleaseoff
    er)and c. Pr ojectsA, C, andD
    10%,t hey i
    eldofalt
    ernati
    veoppor tunit
    iesf orthisproject(gi
    venthatPV d.Al lofthei nvest mentpr ojectswi l
    l betaken.
    factor
    sf or1to10are1. 00;0.909;0.751;0.683;0.621,0.564;0.
    513;0.467; e. Noneoft hei nv estmentpr oj
    ectswi ll
    bet aken. Brigham
    0.424;and0.386)t
    hepresentvalueofthel easealter
    nati
    vesis
    a.P4, 609 c. P750 Opt imal Capit
    alBudget
    ccxxxi
    x
    b.P5, 445 d.P1, 700 . GibsonInc.i
    sconsi
    der
    ingt
    hef
    oll
    owi
    ngf
    ivei
    ndependentpr
    oject
    s:

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page83of83
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG
    ccxl
    i
    Project Cost IRR .
    Atl
    eeAssoci ateshasacapi talstruct uret hatconsi stsof40per centdebtand
    A $200, 000 20% 60per centcommonst ock.They i
    eldt omat ur
    it
    yont hecompany ’
    sdebtis8
    B 600,000 15 percent,thecostofr et
    ainedear ningsi s12per cent ,andt hecostofi ssuing
    C 400,000 12 new equi tyi s 13 per cent.The companyexpect si ts neti ncome to be
    D 400,000 11 $500,000, t
    hedi videndpay outisexpect edt obe40per cent,andi t
    staxrateis
    E 400,000 10 40per cent.Thecompanyi sconsi der i
    ngf i
    veproject s,allwitht hesamer i
    sk.
    Thecompanyhasat argetcapi
    talstr
    uct uret hatconsi stsof40per centdebt Thesizeandest i
    mat edreturnsoft hepr oposedpr ojectsarel istedbelow:
    and60per centequi ty
    .Thecompanycani ssuebondswi t
    hay i
    eldt omat urit
    y Pr oject Cost IRR
    of11per cent .Thecompanyhas$600, 000i nr et
    ainedear nings,andt he A $200, 000 11.00%
    curr
    entstockpr iceis$42pershar e.Thef lotati
    oncost sassoci atedwi th B 100, 000 10. 00
    i
    ssuingnew equi tyar e$2pershar e.Gi bson’sear ningsar eexpect edt o C 100, 000 9. 95
    conti
    nuetogr owat6per centperyear.Nexty ear’sdiv
    idend( D1)i sfor
    ecast ed D 200, 000 9. 85
    tobe$4.00.Thef ir
    mf acesa40per centt axr ate.Whati sthesi zeofGi bson’s E 200, 000 9. 25
    capi
    talbudget?( D) Ont hebasisoft hisinformat i
    on,whati sAt lee’
    sopt imal capital budget?(D)
    a.$200, 000 d.$1, 600,000 a.$800, 000 d.$300, 000
    b.$800, 000 e. $2, 000,000 b.$600, 000 e. $200,000
    c. $1,
    200,000 Brigham c. $400,000 Br
    igham
    ccxl
    .
    PhotonCor porati
    onhasat argetcapitalstruct
    urethatconsistsof60per cent Questions79t hrough82ar ebasedont hef ol
    lowinginformat ion.(06-
    13-61t o64)
    equityand40per centdebt.Thef irm canr ai
    seanunl i
    mitedamountofdebtat Acompanyhast hefoll
    owingthreeinvestmentprojectsav ailable:
    abef ore-taxcostof9per cent.Thecompanyexpect stor etainear ningsof Project Cost I
    nternal Rat eofReturn
    $300,000i nt hecomi ngyearandt of aceat axrateof35per cent.Thel ast A $50mi l
    li
    on 14%
    divi
    dend ( D0)was$2 pershar eand t hegrowt hrateoft hecompanyi s B $75mi l
    li
    on 12%
    constantat6per cent.Ifthecompanyneedst oissuenew equi ty
    ,t hent he C $125mi l
    li
    on 8%
    flot
    ationcostwi l
    lbe$5pershar e.Thecur r
    entstockpri
    ce(P0)i s$30. Phot on Thecompanyhasa40% debtand60% equi t
    ycapi t
    alst ructure.Eachdol larof
    hasthef ollowi nginvestmentoppor t
    unities: i
    nvestmentf undswi l
    lber ai
    sedint hesepr opor
    t i
    ons( 40cent sofdebtand60
    Project Cost IRR centsofequi ty.
    )
    1 $100,000 10. 5% Themar gi
    nalcostoff inanci
    ngincreaseswi ththeamountofnew f undsr aised,
    2 200,000 13. 0 asf ol
    l
    ows:
    3 100,000 12. 0 I
    nterval AmountRaised Weighted-AverageCostofCapi tal
    4 150,000 14. 0 1 Fir
    st$75mi ll
    ion 6%
    5 75,000 9.0 2 Next$100mi l
    l
    ion 10%
    Whati sthecompany ’
    soptimal capit
    al budget?(D) 3 Over$175mi l
    l
    ion 12%
    a.$625, 000 d.$550, 000 Thesei nvestmentoppor t
    uni
    tiesandf inancingcost sar eshowni nt hegr aph
    b.$450, 000 e. $150,000 below:
    c. $350, 000 Brigham Percent
    15 A
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page84of84
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    14 b.8% d.12%
    13 B 3
    12 MCC ccxl
    v.Themar gi
    nalcostofcapi t
    al( MCC)cur vef orthiscompanyr isestwice,
    11 2 fi
    rstwhent hecompanyhasr aised$75mi l
    lionandagai nwhen$175mi l
    l
    ion
    10 ofnewf undshasbeenr aised.Thesei ncr
    easesi ntheMCCcausedbyt he
    9 C a.I ncr
    easesinthereturnsont headditi
    onal investment sundertaken.
    8 I
    OS b.Decr easesinthereturnsont headditi
    onal investmentsunder taken.
    7 1 c. Decreasesinthecostofatl eastoneoft hef inancingsources.
    6 d.I ncr
    easesinthecostofatl eastoneoft hef i
    nancingsources.
    5
    4 CapitalLease
    3 Quest i
    ons92thru94ar ebasedont hefoll
    owingi nf
    or mati
    on. Pol Bobadi l
    l
    a
    2 Af i
    rm mustchoosebet weenl easi
    nganew assetorpur chasingi twit hfunds
    1 fr
    om at ermloan.Undert hepurchaseopt i
    on,thefi
    r m wi
    llpayf iv
    eequal pri
    ncipal
    0 | | | | | | | | | payment sofP1,000eachand6%i nter
    estont heunpai dbal ance.Pr incipaland
    25 50 75 100 125 150 175 200 225 i
    nterestaredueatt heendofeachy earforfi
    vey ears.Alternativel
    y,thef i
    rm can
    $Mil
    li
    on l
    easet heassetf orfi
    vey ear
    satanannualr entalcostofP1, 400wi t
    hpay ment s
    MCC–Margincostofcapit
    al dueatt hebeginningofeachy ear. Thecor poratetaxr at eis35% andt he
    I
    OS–Inv
    estmentopportuni
    tyschedul
    e appropriat
    eafter
    -taxcostofcapit
    alis12%.

    ccxl
    ii
    .Thei nvest
    mentoppor t
    uni
    tyschedul
    e(IOS)shows,i nrankor der,how 92.Whi
    chofthef
    oll
    owi
    ngi
    scl
    osest
    othePVoft
    heaf
    ter
    -t
    axi
    nter
    estpay
    ment
    ?
    muchmoneyt hecompanywoul dinvestatdiffer
    entratesofr et
    urn. Such A.P360 C.P640
    schedul
    escanbedr awnonlyforasetofpr
    ojectsthat B.P453 D.P726
    a.Hav ethesamei nvest
    mentcost. c. Havet hesamenetpr esentvalue.
    b.Ar emutual
    lyexclusi
    ve. d.Ar eindependent. 93.Whichofthef
    oll
    owi
    ngi
    scl
    osestt
    othepr
    esentval
    ueofcosti
    fleasi
    ngt
    he
    asset
    ?
    ccxl
    ii
    i.Thecompanyshouldinv
    estinPr oj
    ect
    (s)<Li
    stA>andhasanoptimal A.P3,674 C.P3,849
    capi
    tal
    budgetof<Li
    stB>mil
    li
    ondol
    lars. B.P3,779 D.P3,992
    a. b. c. d.
    Li
    stA Bonly AandBonly AandConl y Conly 94.Whichofthefoll
    owingiscl
    osestt
    othePVofcostofpur
    chasi
    ngt
    henew
    Li
    stB 75 125 175 125 assetwi
    thater
    ml oan?
    A.3,777 C.4,
    058
    ccxl
    iv.Withoutprej
    udi
    cetoy ouranswertoquesti
    on68, assumet hattheopti
    mal B.3,952 D.4,
    153
    capi
    talbudgetforthecompanyi s$150mill
    ion.Themar ginalcostofcapi
    tal
    andtheappr opr
    iat
    ediscountratetouseinev al
    uat
    ingi nvestmentproposal
    s Comprehensi
    ve
    fort
    hiscompanywoul dbe Quest
    ions99thru101arebasedonthefoll
    owi
    nginfor
    mation. PolBobadi
    l
    la
    a.6% c. 10% LogoCo.isplanni
    ngtobuyacoin-
    operatedmachinecost
    ingP40,
    000.Forbook
    andtaxpurposes,thi
    smachinewillbedepreci
    atedP8,000eachy earforfi
    ve
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page85of85
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    years.Logoest i
    matest hatthismachi newi l
    lyi
    eldanannualcashinflow,netof Di
    scounttabl
    esforsever
    aldi
    ffer
    enti
    nter
    estr
    atest
    hatar
    etobeusedi
    nany
    depreciat
    ionandincomet axes,ofP12, 000.Logo’sdesi
    redrat
    eofr eturnonits di
    scount
    ingcal
    cul
    ati
    onsaregi
    venbel
    ow.
    i
    nvest mentis12%.Att hef oll
    owingdi scountrat
    es,theNPVsofthei nvestment
    i
    nt hismachineare: Pr
    esentVal
    ueof$1.00Recei
    vedatEndofPer
    iod
    Discountrat
    e 12% 14% 16% 18% Per
    iod 9% 12% 15% 18% 21%
    NPV +P3,258 +P1, 197 –P708 –P2, 474 1 .92 .89 .87 .
    85 .83
    2 .84 .80 .76 .
    72 .68
    99.Logo’saccount
    ingr
    ateofr
    etur
    noni
    tsini
    ti
    ali
    nvest
    menti
    nthi
    smachi
    nei
    s 3 .77 .71 .65 .
    61 .56
    expectedt
    obe 4 .71 .64 .57 .
    51 .47
    A.30% C.12% 5 .65 .57 .50 .
    44 .39
    B.15% D.10%
    PresentValueofanAnnuit
    yof$1.00Receiv
    edatt
    heEndofEachPer i
    od
    100. Logo’sexpect
    edpay
    backper
    iodf
    orit
    sinvest
    mentint
    hismachi
    nei
    s Period 9% 12% 15% 18% 21%
    A.2.
    0y ears. C.3.3years. 1 .92 .89 .87 .
    85 .
    83
    B.3.
    0y ears. D.5.0years 2 1.76 1.69 1.63 1.
    57 1.
    51
    3 2.53 2.40 2.28 2.
    18 2.
    07
    101. Logo’
    sexpect
    edI
    RRoni
    tsi
    nvest
    menti
    nthismachi
    nei
    s 4 3.24 3.04 2.85 2.
    69 2.
    54
    A.3.
    3% C.12.
    0% 5 3.89 3.61 3.35 3.
    13 2.
    93
    B.10.
    0% D.15.
    3% Forquest ions96through98onl
    y,assumethatGar
    ri
    soni
    snotsubjecttoincome
    taxes.
    Quest i
    ons95t hrough101ar ebasedont hef oll
    owingi nformat i
    on.CMA12855- 1
    to7 ccxl
    v i
    .IfGar
    ri
    sonrequi
    resi
    nvest
    ment
    stoearn12%r et
    urn,
    theNPVf
    orr
    eplaci
    ng
    Atthebegi nningof1996, Gar r
    isonCor porationisconsi deringther eplacementof theoldmachi
    newi t
    hthenewmachi
    neis
    anoldmachi net hatiscurrentlybeingused.Theol dmachi neisf ull
    ydepreci at ed a.$171,000 c. $143,
    000
    butcanbeusedbyt hecor porati
    onf oranaddi ti
    onal 5y ears,thatis,thr
    ough2000. b.$136,400 d.$83,000 CMA12855-1
    IfGar r
    isondeci dest orepl acet heol dmachi ne,Pi ccoCompanyhasof f
    eredt o
    purchasei tfor$60, 000ont her eplacementdat e.Theol dmachi newoul dhav e ccxl
    vi
    i.TheI
    RR,
    tot
    henear
    estper
    cent
    ,tor
    epl
    acetheol
    dmachi
    nei
    s
    nosal vagevaluei n2000. a.9% c. 17%
    Ifthe r epl
    acementoccur s,a new machi ne wi llbe acqui r
    ed f r
    om Hi l
    lcr est b.15% d.18% CMA12855-
    2
    Industri
    esonJanuar y2,1996.Thepur chasepr iceof$1, 000,000f orthenew
    machi newi llbepai dincash att het imeofr eplacement . Becauseoft he ccxl
    vi
    ii
    .Thepaybackper
    iodt
    orepl
    acet
    heoldmachi
    newit
    hthenewmachi
    neis
    i
    ncreasedef fi
    ciencyoft henew machi ne,est imat edannualcashsav ingsof a.1.14years. c. 3.
    13y
    ear
    s.
    $300,000wi llbegener atedt hrough2000, t
    heendofi t
    sexpect edusef ulli
    fe.The b.2.78years. d.3.33y
    ear
    s. CMA12855-3
    newmachi neisnotexpect edt ohav eanysal vagev alueatt heendof2000.
    Alloper ati
    ng cashr eceipts,oper ating cashexpendi tur
    es,and appl i
    cablet ax Questi
    ons98t hr
    ough101arebasedont
    hefol
    l
    owi
    ngaddit
    ionali
    nformati
    on.
    payment sandcr edi
    tsar eassumedt ooccuratt heendoft hey ear.Gar rison Theassumpt i
    onsare
    empl oysthecal endaryearf orrepor t
    ingpur poses.  Gar ri
    sonrequi
    resal
    linv
    est
    mentstoear
    na12%after
    -t
    axr at
    eofr et
    urntobe
    accepted.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page86of86
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

     Garr
    isonissubjectt
    oamarginali
    ncometaxrat
    eof40%onal
    lincomeand
    gai
    ns( l
    osses)
    . Thepresentvaluef act
    or sf
    orP1at10%i
    s
     Thenewmachi newil
    lhav
    edepreci
    ati
    onasfol
    l
    ows: Year 1 2 3 4
    Year Depr
    eciati
    on PresentValueFact or 0.
    909 0.826 0.
    751 0.
    683
    1996 $250,000 *. Thenetcashf lowf oryear1i
    s(M)
    1997 380,000 a.P25, 850 c. P31,
    250
    1998 370,000 b.P28, 750 d.P34,450
    $1,
    000,000
    *
    . Thenetcashf
    lowf
    ory
    ear4i
    s(M)
    ccxl
    ix.Thepresentv
    alueoft
    hedepr
    eci
    ati
    ont
    axshiel
    dfor1997i
    s a.P35,850 c. P30,
    150
    a.$182,400 c. $109,
    440 b.P35,950 d.P36,250
    b.$121,600 d.$114,304 CMA12855-
    7
    *
    . Thepaybackper
    iodf
    ort
    hepr
    ojecti
    s(M)
    ccl
    .Thepresentv
    alueoft
    heaf
    ter
    -t
    axcashfl
    ow associ
    atedwi
    tht
    hesal
    vageof a.3y ear
    s c. 3.
    5y ear
    s
    theol
    dmachineis(
    M) b.3.17years d.4y ears.
    a.$38,640 c. $32,
    040
    b.$36,000 d.$27,960 CMA12855-5 *
    . Theaccount
    ingr
    ateofr
    etur
    noft
    hepr
    ojecti
    sccl
    i
    ii(
    M)
    a.7% c. 12%
    ccl
    i
    . Thepr esentv al
    ueoftheannualaf
    ter
    -t
    axcashsav i
    ngsthatari
    sefrom the b.9% d.15%( ?)
    i
    ncreasedeffi
    ciencyoft
    henewmachi nethroughouti
    tsli
    fe(
    calcul
    atedbefore
    consi
    derat
    ionofanydepreciat
    iontaxshi
    eld)i
    s *
    . Thepr
    esentval
    ueofy
    eart
    wo’
    scashf
    lowis(M)
    a.$563,400 c. $433,
    200 a.P23,747.
    50 c. P26,
    100.
    75
    b.$375,600 d.$649,800 CMA12855- 6 b.P25,856.
    25 d.P29,750.
    75

    ccl
    i
    i. Ifthenewmachi neisexpect
    edtobesol dfor$80,
    000onDecember31, *
    . Thepr
    esentval
    ueoft
    hepr
    oject
    ’snetcashfl
    owis(M)
    2000,
    thepresentv
    alueoft
    headditi
    onal
    after
    -taxcashf
    lowi
    s a.P95,650.
    15 c. P101,
    863.
    75
    a.$18,240 c. $45,
    600 b.P98,151.
    25 d.P104,750.
    25
    b.$27,360 d.$46, 000 CMA12855-8
    *
    . Theprof
    it
    abi
    l
    ityi
    ndexoft
    hepr
    oject(
    roundedtot
    henear
    esthundr
    edt
    h)i
    s(M)
    Questi
    ons3t hrough11ar ebasedonthefol
    lowi
    ngi nformation. RPCPA0579 a.0.96 c. 1.
    02
    TheBur gosCor porat
    ionisconsideri
    nginvest
    ingi napr oject
    .I trequir
    esan b.0.98 d.1.05
    i
    mmedi atecashout l
    ayofP100, 000. I
    thasal if
    eoff oury ear
    sandwi llbe
    depr
    eciatedonast rai
    ght-
    li
    nebasis(nosal
    vagev al
    ue).Thef i
    rm’st
    axr at
    eis25% *
    . Theprojectwouldbeacceptedont hebasi
    softhe(M)
    andrequiresar etur
    nof10%.I ncomebeforedepreciati
    onispr oj
    ect
    edt obe: a.Pay backandpr esentval
    ueresult
    s.
    YEAR 1 2 3 4 b.Account i
    ngrateofr et
    urnandprofit
    abi
    l
    ityi
    ndexr
    esul
    ts.
    I
    ncome befor
    e P30, 000 P30, 000 P40, 000 P40, 000 c. Paybackresult
    sonly
    depreciati
    on d.aandbcombi ned

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page87of87
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ANSWEREXPLANATI ONS
    *
    . Theprojectwouldber ej
    ectedonthebasisoft
    he(M) ACCOUNTI NGRATEOFRETURN
    ccl
    i
    v
    a.Pay backandpr esentvaluer
    esul
    ts. .JensenManuf acturingisconsi deri
    ng buyinganaut omatedmachi nethat
    b.Account i
    ngrateofr et
    urnandprofi
    tabi
    li
    tyi
    ndexr
    esul
    ts. costs$250,000.Itr equir
    eswor kingcapit
    alof$25,000.Annualcashsavings
    c. Paybackresult
    sonl y areanti
    cipatedtobe$103, 000forfiveyears.Thecompanyusesst r
    aight
    -li
    ne
    d.aandbcombi ned depreci
    ati
    on.Thesal v
    agev alueatt heendoff iveyearsi
    sexpectedt obe
    e. Noneoft heabove. $10,
    000.Thewor kingcapitalwil
    lberecoveredattheendofthemachine'sli
    fe.

    Requi
    red:
    (M) Horngr
    en
    Computetheaccr
    ual
    account
    ingr
    ateofr
    etur
    nbasedont
    hei
    nit
    ial
    invest
    ment.

    CASHFLOWS
    CashFl owf rom Sal eofOl dEqui
    pment
    ccl
    v
    .DarwinCompanyi sconsider
    ingthesaleofamachinewit
    hthefoll
    owing
    charact
    eristics.
    Bookv alue $110,000
    Remai ningusef ulli
    fe 5years
    Annual st r
    aight-
    li
    nedepreci
    ation $? ?
    ?
    Currentmar ketvalue $120,000
    Ift
    hecompanysel lsthemachineitscashoper
    ati
    ngexpenseswil
    lincreaseby
    $20,000pery ear.Thet axr
    ateis40%.

    Requi
    red: D,L&H9e
    a.Findthecashfl
    owf rom sel
    l
    ingt
    hemachine.
    b.Calcul
    atethei
    ncreaseinannual
    netcashout
    flowsasar
    esul
    tofsel
    l
    ing
    t
    hemachine.

    Est i
    mat i
    ngPr et
    axCashI nflows
    ccl
    vi
    .(I
    gnoreincomet axesint hi
    sproblem.)ABCompanyi sconsider
    ingthe
    purchaseofamachi nethatpromisestoreduceoperati
    ngcostsbythesame
    amountf orever
    yy earofi t
    s6-yearuseful
    li
    fe.Themachinewill
    cost$83,150
    andhasnosal vagev alue.Themachi nehasa20%i nter
    nalr
    ateofretur
    n.

    Requi
    red:(
    Dif
    ficul
    t) N&G
    Whatistheannualcostsav
    ingspr
    omi
    sedbyt
    hemachi
    ne?
    ccl
    vi
    i
    . SkywayCorpor
    ati
    oni
    sconsi
    der
    ingpur
    chasi
    nganewmachinetobeused
    tomanufact
    ureanew pr
    oduct
    ,call
    edJax,whichwi
    l
    lsel
    lfor$15auni t
    .
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page88of88
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Vari
    ablemanuf act
    uring costisexpect ed to be$5 f oreach unitofJax save$37,
    500peryeari
    ncashoper
    ati
    ngcost
    s.I
    twoul
    dbedepr
    eci
    atedusi
    ng
    manuf act
    ured,and v ar
    iablemar keti
    ng cost,$2 f oreach unitsold. The thest
    rai
    ght-
    li
    nemethod.Thet
    axrat
    eis40%.
    machinebei ngconsideredcouldproduce10, 000unitsayear,al
    lofwhi chthe
    MarketingDepar t
    mentbel i
    evescoul dbesol df or$15aunit.Thepr oposed Required: D, L&H9e
    machinewoul dcost$250, 000.Al t
    hought hemachi newouldpr obablylast8 a.Fi ndthenetinvestmentrequi
    redtoreplacetheexist
    ingmachi
    ne.
    years,managementbel iev
    est hatthepr oduct'sli
    fecycl
    ewoul dbeonl y5 b.Comput etheincreasei
    nannual i
    ncomet axesifthecompanyreplaces
    years.Thesal vagev al
    ueoft henewmachi neatt heendoft heproduct '
    s5- themachine.
    yearli
    fecycleisexpectedt obe$50, 000.Managementdoesnotbel ievethe c. Comput etheincreasei
    nannual netcashflowsifthecompanyreplaces
    machinecoul dbeusedt omanuf actureanyoft hecompany'sotherproducts. themachine.
    ccl
    x
    Requir
    ed: Cart
    er&Usr y . Pepi nCompanyi sconsideringreplaci
    ngamachinethathasthefollowing
    Comput ethepret
    axnetcashi nfl
    owsexpectedfrom thecapitalexpendit
    ure characteri
    st ics.
    proposalforeachyear,andignori
    ngtheeffectofincomet axes,determine Bookv alue $100,000
    theexcessofcashinf
    lowsfrom all
    sourcesovert
    hecostofthemachi ne. Remai ni ngusef ulli
    fe 5years
    Annual st rai
    ght-li
    nedepr eci
    ati
    on $? ?
    ?
    CashFl owf rom Sal eofOl dMachine&I ncrementalCashFlow Cur r
    entmar ketv alue $60,000
    ccl
    vi
    ii
    . St ockhol m Companyi sconsideringthesaleofamachinewit
    hthe Ther epl
    acementmachi newoul dcost$150,000,
    haveafive-
    yearl
    ife,
    and
    fol
    lowingchar acter
    istics. save$50, 000pery eari ncashoperatingcosts.I
    twoul
    dbedepr eciat
    edusi ng
    Bookv alue $120,
    000 thestraight-linemet hod.Thet axrateis40%.
    Remai ninguseful li
    fe 5year
    s
    Annual strai
    ght-l
    inedepreciat
    ion $24,
    000 Required: D, L&H9e
    Currentmar ketv alue $70,
    000 a.Fi ndthenetinvestmentrequi
    redtoreplacetheexist
    ingmachi
    ne.
    Ift
    hecompanysel l
    st hemachineitscashoper ati
    ngexpenseswi
    l
    lincr
    easeby b.Comput etheincreasei
    nannual i
    ncomet axesifthecompanyreplaces
    $30,000pery earduet oanoperati
    ngl ease.Thetaxrat
    eis40%. themachine.
    c. Comput etheincreasei
    nannual netcashflowsifthecompanyreplaces
    Requi
    red: D,L&H9e themachine.
    a.Findthecashfl
    owf rom sel
    l
    ingt
    hemachine.
    b.Calcul
    atethei
    ncreaseinannual
    netcashout
    flowsasar
    esul
    tofsel
    l
    ing PAYBACKPERI OD
    t
    hemachine. Pay backPer iod
    NETPRESENTVALUE
    ccl
    xi
    NetI nvestment , IncrementalCashFl
    ow&I ncomeTax .ABCBoatCompanyi sint
    erestedi nreplacingamol di
    ngmachi newi t
    hanew
    ccl
    i
    x
    .RuskCompanyi sconsideri
    ngreplaci
    ngamachinethathast
    hefoll
    owing improv edmodel .Theol dmachi nehasasal v
    agev alueof$20, 000nowanda
    characteri
    st ics. predictedsalvagev alueof$4, 000insi xyears,ifrebuilt.Ift
    heol dmachi neis
    Bookv alue $200,000 kept,itmustber ebuilti
    noney earatapr edictedcostof$40, 000.
    Remai ni ngusef ull
    ife 4y ears Thenew machi necost s$160, 000andhasapr edictedsalv agev al
    ueof
    Annual st r
    aight-
    li
    nedepreci
    ati
    on $? ?? $24,000att heendofsi xyears.Ifpurchased, t
    henewmachi newi l
    lall
    owcash
    Currentmar ketval
    ue $160,000 savingsof$40, 000f oreachoft hef i
    rstthreey ear
    s, and$20, 000f oreachyear
    Ther eplacementmachi newoul dcost$300,000,haveafour
    -yearlif
    e,and ofitsremainingsix-yearli
    fe.
    CMAEXAMI NATI ONQUESTI ONS Page89of89
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Costofequipmentneeded...
    ..
    ..
    ..
    ..
    ..
    ..
    ...
    ..
    ..
    ..
    ..
    ..
    . $300,000
    Requi
    red:(
    D) Horngr
    en Workingcapit
    alneeded..
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    ...
    ..
    ..
    ..
    .. $50,000
    Whatisthenetpresentval
    ueofpur
    chasi
    ngt
    henewmachi
    nei
    fthecompany Annualcashrecei
    ptsfrom t
    hedeliveryofpar t
    s,lesscashoperati
    ngcosts
    hasarequi
    redrat
    eofr et
    urnof14%? $70,000
    Salv
    agev al
    ueofequipmentattermi nati
    onoft hecontract $5, 000
    ccl
    xi
    i
    . ( Ignoreincome t axes i
    nt his probl em.)Jim Bi ngham is considering Iti
    snotexpectedthatthecontr
    actwoul dbeext endedbey ondt
    hei ni
    ti
    al
    start
    ingasmal lcateri
    ngbusiness.Hewoul dneedt opurchaseadel i
    veryv an contr
    actperi
    od.Thecompany '
    sdiscountr atei
    s10%.
    andv ari
    ousequi pmentcosting$125, 000t oequipthebusinessandanot her
    $60,000forinventori
    esandot herwor kingcapitalneeds.Rentforthebuilding Requir
    ed:(
    Moder at
    e) N&G
    usedbyt hebusi nesswi l
    lbe$35, 000 pery ear
    .Ji m’smar keti
    ng studies Usethenetpresentval
    uemethodtodet
    ermineifthecontr
    actshoul
    dbe
    i
    ndicatet hatthe annualcash i nfl
    ow f rom the business wil
    lamountt o accept
    ed.Roundallcomput
    ationst
    othenearestdoll
    ar.
    $120,000.Inaddi t
    iontothebui l
    dingr ent,annualcashout fl
    ow foroperating
    ccl
    xv
    costswi l
    lamountt o$40,000.Jim want st ooperatethecateri
    ngbusinessf or . ( Ignor
    ei ncome t axes int his problem. )Mar k Stevens i
    s consideri
    ng
    onlysixyears.Heest i
    matesthattheequi pmentcouldbesol datthattimef or openingahobbyandcr aftstore.Hewoul dneed$100, 000t oequi pthe
    4%ofi tsori
    ginalcost.Ji
    m usesa16%di scountrate. businessand anot her$40, 000 f orinv entori
    esand ot herwor king capi
    tal
    needs.Rentont hebui l
    dingusedbyt hebusi nesswil
    lbe$24, 000pery ear.
    Requi
    red:
    (Moderat
    e) N&G Mar kesti
    matest hatt heannualcashi nflowf rom thebusinesswillamountto
    Wouldyouadv
    iseJimtomaket
    hisi
    nvest
    ment
    ? $90,000.Inaddit
    iont obui l
    dingrent,annualcashout fl
    owf oroperati
    ngcosts
    willamountto$30, 000.Mar kplanstooper atet hebusi
    nessforonlysixyears.
    ccl
    xi
    ii
    . ( Ignor
    eincomet axesi nthispr oblem. )GeneralManuf acturingCompany Heest imatesthatt heequi pmentandf urnishingscouldbesoldatt hattime
    consistsofseveraldi vi
    sions,oneofwhi chistheTranspor t
    ati
    onDi visi
    on.The for10%oft hei
    ror i
    ginal cost.Markusesadi scountrateof16%.
    companyhasdeci dedt odi sposeoft hisdiv i
    sionsinceitnol ongerf i
    tst he
    company '
    slong-term strategy.Anof f
    erof$9, 000,000hasbeenr eceivedfrom Requi
    red:(
    Moder
    ate) N&G
    apr ospecti
    vebuy er.IfGener alr etai
    nedt hedi vi
    sion,thecompanywoul d Wouldyouadvi
    seMar kt
    omaket
    hisi
    nvest
    ment
    ?Uset
    henetpr
    esentval
    ue
    operatethedivisionf oronl yni ney ears,af t
    erwhi chthedi visionwoul dno method.
    l
    ongerbeneededandwoul dbesol dfor$600, 000.Ifthecompanyr etai
    nst he
    ccl
    xvi
    di
    vision,animmedi ateinv estmentof$500, 000woul dneedt obemadet o (Ignoreincomet axesinthispr oblem.)BradleyCompany '
    sr equiredr ateof
    updat eequi
    pmentt ocur rentst andards.Annualnetoper at
    ingcashf lows returnis14%.Thecompanyhasanoppor t
    unitytobetheexclusivedi st
    ribut
    or
    wouldbe$1, 805,000i fthedi visi
    oni sr etai
    ned.Thecompany ’sdi scountr ate ofav erypopul
    arconsumeri tem.Nonew equi pmentwoul dbeneeded,but
    i
    s12%. thecompanywoul dhav etouseone- fourt
    hoft hespacei nawar ehouseit
    owns.Thewar ehousecost$200, 000new.Thewar ehouseiscur rentlyhalf
    -
    Requi
    red:(Moderat
    e) N&G empt yandt her
    ear enootherpl anst ousetheempt yspace.I naddi ti
    on,the
    Usi
    ng t he net pr esent v
    alue method, det
    ermi
    ne whet
    her Gener
    al company woul d hav et oi nvest$100, 000 in wor ki
    ng capitalt o carry
    Manufactur
    ingshoul
    dacceptorrej
    ectt
    heoff
    ermadebythepot
    ent
    ial
    buyer
    . i
    nv entori
    esandaccount sreceivableforthenew productli
    ne.Thecompany
    woul dhav ethedistr
    ibut
    orshipf oronly5y ear
    s.Thedi st
    ri
    but orshipwoul d
    ccl
    xi
    v
    (I
    gnor
    eincometaxesi
    nthisproblem.)VernonCompanyhasbeenoffer
    eda7 gener at
    ea$17,000netannual cashi nfl
    ow.
    -y
    earcont
    ractt
    osupplyapartforthemili
    tary
    .Aft
    ercar
    efulst
    udy,
    the
    companyhasdevel
    opedthefoll
    owi ngest
    imateddat
    arelat
    ingtot
    hecontr
    act
    : Requi
    red:
    (Moder
    ate) N&G
    CMAEXAMINATIONQUESTIONS Page90of90
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    COMPREHENSI VE
    Whati
    sthenetpresentval
    ueoft
    hepr
    ojectatadi
    scountr
    ateof14%?Shoul
    d Account ingRat eofRet urn&Pay back
    ccl
    xi
    x
    t
    heproj
    ectbeaccepted? . ( Ignorei ncome t axes i nt his problem.)Fer r
    is Company has an old
    machi net hati sf ull
    ydepr eciatedbuthasacur rentsalvagevalueof$5,000.
    ccl
    xvi
    i
    . ( I
    gnor eincomet axesinthisprobl
    em.)Thefol
    lowingdataconcernan Thecompanywant stopur chaseanewmachi net hatwouldcost$60,000and
    i
    nvestmentpr oject: havea5- yearusef ullif
    eandzer osalv
    agev al
    ue.Expectedchangesinannual
    I
    nv estmenti nequi pment $16,000 rev
    enuesandexpensesi fthenewmachi neispurchasedar e:
    Netannual cashi nfl
    ows $3,600 Increasedr evenues. ..
    ..
    ..
    ...
    ..
    ... $63,
    000
    Wor kingcapitalrequired $4,500 Increasedexpenses:
    Salvagev alueoft heequipment $2,000 Salaryofaddi t
    ionaloper ator.. $20,000
    Li
    feoft hepr oject 12years Suppl i
    es. ...
    ..
    ...
    ...
    ..
    ..
    ..
    ..
    ... 9,000
    Discountr ate 14% Depr eciation. .
    ...
    ..
    ..
    ..
    ..
    ...
    ..
    . 12,000
    Thewor kingcapi t
    al will
    bereleasedforuseel
    sewhereattheconclusi
    onof Mai ntenance. ..
    ..
    ..
    ..
    ...
    ..
    ..
    ..
    .. 4,000 45, 000
    theproject. Increasedneti ncome. ...
    ..
    ...
    ...
    .. $18,
    000

    Requi
    red: N&G Requi
    red:(
    Easy
    ) N&G
    Computethepr
    oject
    'snetpr
    esentv
    alue. a.Computethepaybackper
    iodonthenewequipment.
    b.Computethesi
    mpl er
    ateofret
    urnonthenewequipment
    .
    ccl
    xvi
    i
    i
    (
    Ignorei
    ncometaxesinthi
    spr
    oblem.)MonsonCompanyisconsi
    der
    ing
    t
    hreeinvest
    mentopport
    unit
    ieswi
    thcashfl
    owsasdescr
    ibedbel
    ow: AccountingRateofRetur
    n,Payback&NPV
    ccl
    xx
    . Scottsohasaninvest
    mentoppor
    tunit
    ycost
    ing$180,
    000t
    hati
    sexpect
    ed
    Pr
    ojectA:Cashi
    nvest
    mentnow $15,
    000 toy
    ieldt
    hefoll
    owingcashfl
    owsoverthenextf
    ivey
    ears:
    Cashi
    nfl
    owattheendof5y
    ear
    s $21,
    000 YearOne $30,
    000
    Cashi
    nfl
    owattheendof8y
    ear
    s $21,
    000 YearTwo $60,
    000
    YearThree $90,
    000
    Pr
    ojectB:Cashinvestmentnow $11,
    000 YearFour $60,
    000
    Annualcashoutfl
    owfor5year
    s $3,
    000 YearFive $30,
    000
    Addi
    tionalcashi
    nfl
    owattheendof5y
    ear
    s $21,
    000
    Requi
    red: D,
    L&H9e
    Pr
    ojectC:Cashinvestmentnow. .
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    ..
    . $21,
    000 b.Findthebookr
    ateofr
    etur
    nofthei
    nvestment.
    Annualcashinfl
    owf or4years...
    ..
    ..
    ..
    . $11,
    000 c. Fi
    ndtheNPVofthei
    nvest
    mentatacutoffr
    ateof12%.
    Cashoutfl
    owatt heendof3y ears..
    ..
    .. $5,
    000
    ccl
    xxi
    Addi
    tionalcashinf
    lowattheendof4y ear
    s $15,
    000 . Scott
    sohasaninvest
    mentoppor
    tunit
    ycosti
    ng$300,
    000t
    hatisexpect
    ed
    t
    oyi
    eldthefol
    lowi
    ngcashfl
    owsoverthenextsi
    xyear
    s:
    Requi
    red:
    (Moderate) N&G YearOne $75,
    000
    Computethenetpr esentval
    ueofeachpr
    ojectassumi
    ngMonsonCompany YearTwo $90,
    000
    usesa12%discountr at
    e. YearThree $115,
    000
    YearFour $130,
    000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page91of91
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    YearFi
    ve $100,
    000 year2,
    and$200, 000inyears3and4.Theequi
    pmentwoul dbescrapped(f
    or
    YearSi
    x $90,
    000 nosalvage)attheendoft hefourt
    hyearandthewor ki
    ngcapit
    alwouldbe
    l
    iqui
    dated.Theequi pmentwouldbef ul
    lydepreci
    atedbyt hestrai
    ght-
    li
    ne
    Requi
    red: D,
    L&H9e methodov eri
    tsfour
    -yearl
    if
    e.
    b.Findthebookr
    ateofr
    etur
    nofthei
    nvestment.
    c. Fi
    ndtheNPVofthei
    nvest
    mentatacutoffr
    ateof10%. REQUI RED: Bar
    fi
    eld
    (a)(Presentval
    uetabl
    esneededtoanswerthi
    squest
    ion.)I
    fTrebleusesa
    ccl
    xxi
    i
    . ThemanagementofEl it
    eCooki esInc.i sconsider i
    ngt hepur chaseofa discountrat
    eof16percent
    ,whati
    stheNPVoftheproposedproductl
    ine
    newshapingmachi ne.Themachi newillcost$100,000andwi llhaveauseful i
    nv estment?
    l
    ifeof10y earswi t
    hasal vagevalueof$10, 000att heendoft eny ear
    s.The (b)Whati sthepay
    backperi
    odfort
    heinv
    est
    ment?
    i
    nv est
    mentwi llr
    esulti
    ncostsav i
    ngsof$16, 000pery earforeachy earoft
    he
    machine'
    slife.Thet axrateiszero,andt heappropriat ediscountratefort
    he Pay back&I
    RR
    ccl
    xxv
    companyi s10%.( Thepresentvaluefact orfor$1r eceivedatt heendof10 . Supplythemi ssi
    ngdat aforeachofthefol
    lowi
    ngproposals.(
    D)
    yearsis.
    386, andthefactorfor$1recei
    v edannuallyf or10y earsis6.145.
    ) Horngr
    en
    Proposal A Pr oposalB Pr oposal C
    Requi
    red: Car
    ter&Usr
    y I
    nit
    ialinv estment (a) $62,900 $226,000
    Annual netcashi nfl
    ow $60, 000 (
    c) (e)
    (
    1)Computethepaybackperi
    od. Li
    fe,iny ears 10 6 10
    (
    2)Computetheaccounti
    ngrateofretur
    nont
    heav
    eragei
    nvest
    ment
    . Sal
    vagev al
    ue $0 $10,000 $0
    (
    3)Computethenetpresentv
    alue. Paybackper i
    odiny ear (
    b) (
    d) 5.65
    (
    Roundanswerst
    otwodeci malplaces.
    ) I
    nternalr ateofreturn 12% 24% (f)

    Pay back&NPV NPV&PI


    ccl
    xxi
    i
    i
    .( Pr
    esentvaluet abl
    esneededtoanswerthisquest
    ion.)WoodPr oducti
    ons ccl
    xxv
    i
    .RacineCo.hast heoppor tunit
    ytoint
    roduceanewpr oduct
    .Raci neexpect
    s
    isconsideringthepur chaseofanew mov i
    ecamer a,whi chwi l
    lbeusedf or theprojecttosellfor$200andt ohaveper-uni
    tv ari
    ablecostsof$130and
    maj ormotionpi ct
    ures.Thenewcamer awi
    llcost$30,000, haveaneight-y
    ear annual cashf i
    xedcostsof$6, 000,
    000.Expect edannual sal
    esv ol
    umei s
    lif
    e,andcreatecostsav i
    ngsof$5,
    000pery ear.Thenewcamer awil
    lrequir
    e 125,000uni ts.Theequipmentneededt obringoutt henewpr oductcosts
    $700ofmai ntenanceeachy ear
    .WoodProduct i
    onsusesadi scountrat
    eof9 $7,200,000,hasaf our-
    yearlif
    eandnosal v
    agev alue,andwoul dbe
    percent. depreciatedonast rai
    ght-
    linebasis.Wor ki
    ngcapi talof$500,000wouldbe
    necessar ytosupporttheincreasedsales.Racine'scostofcapitali
    s12%and
    REQUI
    RED: Bar
    fi
    eld itsi
    ncomet axrateis40%.
    a.Computethenetpresentv
    alueoft
    henewcamer
    a.
    b.Deter
    minethepaybackperi
    od. Requi
    red: D,
    L&H9e
    ccl
    xxi
    v
    a.Comput et
    heNPVofthisoppor
    tuni
    ty.
    . Tr
    ebl
    e Co.is consider
    ing an i
    nvestmentin a new productli
    ne.The b.Comput et
    hepr
    ofi
    tabi
    l
    ityi
    ndexofthi
    soppor
    tuni
    ty.
    i
    nvest
    mentwouldr equir
    eani mmedi ateoutl
    ayof$100,000f orequipment
    andanimmediat
    einv est
    mentof$200,000inworki
    ngcapital
    .Theinvestment
    i
    sexpectedt
    ogener ateanetcashinflowof$100,000inyear1,$150,000in
    CMAEXAMINATIONQUESTI ONS Page92of92
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    c. Fi
    ndt
    heI
    RRont
    hei
    nvest
    ment
    .
    NPV&I RR
    ccl
    xxv
    ii ccl
    xxxi
    . TheZer oMachineCompanyiseval
    uatingacapi
    talexpendit
    urepr
    oposal . Book&Bi bl
    eBookst or
    edesirest obuyanew codi ngmachinetohelp
    thatrequi
    resanini
    ti
    ali
    nvest
    mentof$20,960andhaspredictedcashi
    nfl
    ows controlbookinvent
    ori
    es.Themachi nesel
    l
    sf or$36,586andr equi
    reswor
    king
    of$5,000peryearf
    or10years.I
    twi
    ll
    havenosalvagevalue. capi
    talof$4,000.It
    sesti
    matedusef ull
    i
    fei
    sf i
    vey earsandwi l
    lhav
    easalvage
    val
    ueof$4, 000.Recoveryofworkingcapit
    alwi l
    lbe$4, 000attheendofits
    Requi
    red:(M) Horngr
    en usefulli
    fe.Annualcashsav i
    ngsfrom thepur chaseoft hemachinewi
    l
    lbe
    a.Usingar equi
    redrateofreturnof16%,determinet
    henetpr
    esentval
    ueof $10,
    000.
    t
    hei nvestmentproposal
    .
    b.Det erminetheproposal'
    sinter
    nalr
    ateofreturn. Requi
    red:(D) Hor
    ngr
    en
    a.Comput ethenetpresentvalueata14%r equi
    redr
    ateofr
    etur
    n.
    ccl
    xxv
    ii
    i
    .Net work Service Cent
    eri s consi deri
    ng purchasing a new computer b.Comput etheint
    ernalrat
    eofr et
    urn.
    networkfor$82,000.Itwil
    lrequireaddi ti
    onalworkingcapit
    alof$13,000.I
    ts c. Deter
    mi nethepaybackperiodoftheinv
    estment.
    anti
    cipat
    edeight-yearli
    fewillgenerateaddi t
    ionalcli
    entrevenueof$33,000
    ccl
    xxxi
    i
    annuall
    ywithoper at
    ingcosts,excludingdepreciat
    ion,of$15,000.Attheend . Thepr esidentofEr adi
    catorCor p.isconsider
    ingthepur chaseofnew
    ofeightyears,itwillhaveasal vagev al
    ueof$9, 500andr et
    urn$5,000in demol i
    ti
    onequi pmentcosti
    ng$100, 000,wit
    hausef ull
    if
    eoffiv
    ey earsandno
    worki
    ngcapital.Taxesarenotconsi dered. salvagevalue.Thenewequi pmentwoul dyiel
    danannualafter-t
    axcashf l
    ow
    of$29,129.Anappr opri
    atediscountr at
    eforthist
    y peofequipmenti s12%.
    Requi
    red:(
    D) Horngr
    en (Thepresentv al
    ueofanannui t
    yofadol l
    ar@ 12%forfiv
    eyearsis3.605.The
    a.Ifthecompanyhasar equi
    redr at
    eofret
    urnof14%,whati
    sthenet presentval
    ueofadol lar@ 12%r eceivedatt
    heendoft hefi
    fthyearis.567.
    )
    pr
    esentvalueoftheproposedinvest
    ment
    ?
    b.Whati stheint
    ernalr
    ateofreturn? Requir
    ed: Car
    ter&Usr
    y
    (1)Computethepaybackperiodtothenearesttenthofayear
    .
    Pay back,NPV&I RR (2)Computethenetpresentval
    uet othenearestwholedol
    lar
    .
    ccl
    xxi
    x
    . Aninvest
    mentoppor t
    uni
    tycost
    ing$600,
    000i
    sexpect
    edt
    oyi
    eldnetcash (3)Computethei
    nternalrat
    eofr et
    urnonthepur chase.
    flowsof$120,000annual
    lyf
    ortenyear
    s. (4)Shoul
    dtheequipmentbepur chased?

    Requi
    red: D,
    L&H9e Account ingRateofRet urn,Payback,
    NPV&I RR
    ccl
    xxxi
    i
    i
    a.FindtheNPVofthei
    nv est
    mentatacutof
    frat
    eof12%. .I gnor
    ei ncomet axesinthispr
    oblem.)Ur sus,I
    nc.
    ,i
    sconsi deringapr oj
    ect
    b.Findthepay
    backperi
    odoft hei
    nvest
    ment. thatwoul dhav eat en-
    yearli
    feandwoul drequirea$1,000,
    000i nv estmenti
    n
    c. Fi
    ndtheI
    RRontheinvestment. equipment .Att heendoft enyear
    s,theprojectwouldterminateandt he
    equipmentwoul dhavenosalvagevalue.Thepr oj
    ectwouldpr ovidenet
    ccl
    xxx
    . Aninvest
    mentoppor
    tuni
    tycost
    ing$180,
    000i
    sexpect
    edt
    oyi
    eldnetcash incomeeachy earasfoll
    ows:
    f
    lowsof$60,
    000annual
    l
    yforfi
    veyears. Sales $2, 000,
    000
    Lessvar i
    ableexpenses 1, 400,
    000
    Requi
    red: D,
    L&H9e Contri
    butionmar gin 600,
    000
    a.FindtheNPVoft hei
    nvest
    mentatacutof
    frat
    eof12%. Lessfixedexpenses 400,
    000
    b.Findthepaybackper
    iodofthei
    nvest
    ment. Netincome $200, 000
    CMAEXAMI NATI
    ONQUESTI ONS Page93of93
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    operat
    ingcost
    s?Int
    erpol
    atetothenear
    estt
    ent
    hofaper
    cent
    .Woul
    dyou
    Alloft
    heabovei
    tems,exceptfordepr
    eci
    ati
    onof$100,
    000ay ear,
    repr
    esent recommendpurchase?Expl
    ain.
    cashfl
    ows.Thedepr
    eciati
    onisincl
    udedi
    nthefi
    xedexpenses.The
    company’
    srequi
    redr
    ateofr et
    urnis12%. Requi redInvest
    ment ,Profi
    tabi
    l
    ityI
    ndex&I RR
    ccl
    xxxv
    i
    .( Presentv al
    uet ablesneeded t o answerthisquestion.)Janehasan
    Required:
    (Moder
    ate) N&G oppor tunit
    yt oinvestinapr ojectthatwilly
    ieldfourannualpay mentsof
    a.Comput et
    heproj
    ect
    ’snetpresentvalue. $12, 000wi thnosal vage.Thef ir
    stpay mentwillberecei
    v edi nexactl
    yone
    b.Comput et
    heproj
    ect
    ’si
    nternalrat
    eofr eturn,
    int
    erpol
    ati
    ngt
    othenear
    est year .Onl ow-ri
    skpr oj
    ectsoft histy
    pe,Janer equir
    esar eturnof6per cent
    .
    tenthofaper
    cent
    . Based ont hi
    sr equir
    ement ,theprojectgeneratesapr of i
    tabil
    i
    tyindexof
    c. Comput et
    heproj
    ect
    ’spaybackperiod. 1. 03953.
    d.Comput et
    heproj
    ect
    ’ssi
    mpl erateofreturn.
    REQUI
    RED: Bar
    fi
    eld
    Requi redInvestment ,PaybackPeri
    od&NPV a.HowmuchisJaner
    equir
    edtoinvesti
    nthi
    spr
    oject
    ?
    ccl
    xxxiv
    .Denal iCompanyi sev al
    uat
    ingacapi talbudgetingproposal,requi
    ri
    ngan b.Whatist
    hei
    nter
    nal
    rat
    eofreturnonJane'
    spr
    oject
    ?
    i
    ni t
    iali
    nvestmentof$45, 000.Theproj
    ectwi l
    lhaveaf i
    ve-
    yearli
    fe.Theaf t
    er-
    taxannualcashi nfl
    owf r
    om thi
    sinvest
    menti s$12,000.Thecostofcapi tali
    s NetCashFl ow&Pay back
    ccl
    xxxv
    ii
    10%.( Thepr esentv al
    ueof$1@ 10%r eceivedattheendoff i
    vey earsi
    s.621. .Mar quet t
    eCompanyi sconsi
    deri
    ngthepurchaseofamachi
    newiththe
    (Thepr esentvalueof$1@ 10%r ecei
    vedeachy earforf
    iveyearsis3.791.
    ) followingchar act
    eristi
    cs.
    Cost $150,
    000
    Requir
    ed: Cart
    er&Usr
    y Estimat edusefulli
    fe 10years
    (1)Whati
    sthepay backperi
    od? Expect edannual cashcostsavi
    ngs $35,
    000
    (2)Computethenetpresentval
    ueofthepr
    oject
    . Mar quett
    e'staxrateis40%, i
    tscostofcapi
    tal
    is12%,anditwi
    ll
    usestrai
    ght-
    (3)Whatamountshoul d Denalihaveinvest
    ed f
    ivey
    ear
    s ago,at10% linedepr eciati
    onforthenewmachi ne.
    compoundedannuall
    y,tohave$45,
    000now?
    Requi
    red: D,
    L&H9e
    Requi r
    edInvestment,NPV&IRR a.Comput etheannual
    after
    -t
    axcashfl
    owsfort
    hispr
    oject
    .
    ccl
    xxxv
    (I
    gnoreincometaxesi
    nthispr
    oblem.)Pr
    inceCompany ’
    srequi
    redrateof b.Findthepaybackper
    iodforthi
    spr
    oject
    .
    ret
    urnis10%.Thecompanyi sconsi
    deri
    ngthepurchaseofthreemachines,
    asindi
    catedbelow.Consi
    dereachmachineindependent
    ly. NetCashFl ow&NPV
    ccl
    xxxv
    ii
    i
    .Toft
    eisconsideri
    ngthepur
    chaseofamachine.Dat
    aar
    easf
    oll
    ows:
    Requir
    ed:(Moderate) N&G Cost $100,
    000
    a.Machi neAwi llcost$25,00andhav eal if
    eof15y ears.I t
    ssalvagev al
    ue Useful
    li
    fe 10year
    s
    wil
    lbe $1,000,and costsav ings are project
    ed at$3, 500 pery ear. Annualst
    raight
    -l
    inedepr
    eci
    ati
    on $10,
    000
    Computethemachi ne’snetpresentvalue. Expect
    edannual sav
    ingsi
    ncashoperat
    ioncost
    s $18,
    000
    b.How muchwi llPri
    nceCompanybewi l
    li
    ngt opayf orMachi neBi fthe Tof t
    e'scut
    offratei
    s12%andi t
    staxrat
    eis40%.
    machinepromi sesannualcashinfl
    owsof$5, 000pery earfor8years?
    c. MachineChasapr oject
    edlif
    eof10y ears.Whatist hemachi ne'
    sinternal Requi
    red: D,
    L&H9e
    rat
    eofr et
    urni fitcosts$30,000andwi llsave$6,000annual l
    yincash a.Comput et
    heannual
    netcashf
    lowsf
    ort
    hei
    nvest
    ment
    .
    CMAEXAMI NATIONQUESTI ONS Page94of94
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    b.Comput
    etheNPVoft
    hepr
    oject
    . Requi
    red: D,
    L&H9E
    a.Findthei
    ncreaseinannualaft
    er-
    taxcashf
    lowsf
    ort
    hisoppor
    tuni
    ty.
    NetCashFl ow, Payback&NPV b.Findthepay
    backper i
    odont hi
    sproject
    .
    ccl
    xxxix
    .Bilt
    -RiteCo.hast heoppor tunit
    ytointr
    oduceanew pr oduct. Bil
    t-
    Rit
    e c. Fi
    ndtheNPVf ort
    hisproj
    ect.
    expectsthepr oducttosellfor$60andtohav eper-
    uni
    tvariablecostsof$40
    andannualcashf i
    xedcost sof$3,000,
    000.Expectedannualsal esvolumeis NetCashFl ow&PI
    ccxci
    i
    250,000uni ts.Theequi pmentneededt obr i
    ngoutthenew pr oductcosts . Zmol ekCompanyisconsi
    deri
    ngthepur chaseofamachi necosting
    $5,000,
    000,has a f our
    -yearl i
    fe and no salv
    age value,and woul d be $700,000withausefull
    if
    eof10years.Annual cashcostsavi
    ngsare
    depreciatedonast rai
    ght-l
    inebasis.Bil
    t-
    Rit
    e'scostofcapitalis10%andi t
    s expectedtobe$200,000.Zmol
    ek'
    sincomet axratei
    s40%andi tscostof
    i
    ncomet axrateis40%. capit
    alis12%.Zmolekexpect
    stousest r
    aight-l
    inedepreci
    ati
    onfortax
    purposes.
    Requi
    red: D,
    L&H9e
    a.Findthei
    ncreaseinannualaft
    er-
    taxcashf
    lowsf
    ort
    hisoppor
    tuni
    ty. Requi
    red: D,
    L&H9E
    b.Findthepay
    backper i
    odont hi
    sproject
    . a.Comput et
    heexpectedincreaseinannualnetcashf
    lowf
    ort
    hisproj
    ect
    .
    c. Fi
    ndtheNPVf ort
    hisproj
    ect. b.Comput et
    heprof
    itabi
    li
    tyindexfortheproj
    ect.
    ccxc ccxci
    i
    i
    .
    RenoCompanyi sconsideri
    ngthepurchaseofamachi
    newiththefol
    lowing . Cabl eCompanyi sconsider
    ingthepurchaseofamachi
    newiththe
    charact
    eri
    stics. fol
    l
    owingchar acter
    isti
    cs.
    Cost $160,000 Cost $100,000
    Esti
    mat edusefull
    if
    e 5years Usefulli
    fe 10years
    Expectedannualcashcostsav i
    ngs $56,000 Expectedannual cashcostsav i
    ngs $30,000
    Expectedsalvagevalue none Cable'
    sincomet axrateis40%andi t
    scostofcapi
    tal
    is12%.Cableexpect
    sto
    Reno'staxrateis40%,itscostofcapi
    tali
    s12%,andi
    twil
    lusestr
    aight-l
    i
    ne usestrai
    ght-l
    inedepreciat
    ionfortaxpurposes.
    depreci
    ati
    onf orthenewmachi ne.
    Requir
    ed: D,L&H9E
    Requi
    red: D,
    L&H9E a.Comput etheexpectedincreaseinannualnetcashflowf orthisproject
    .
    a.Comput etheannualafter-
    taxcashfl
    owsfort
    hispr
    oject
    . b.Comput etheprofi
    tabil
    it
    yindexfortheproj
    ect.
    b.Findthepaybackperiodforthi
    sproject
    . c. Howwoul dtheprofi
    tabi
    li
    tyindexfort
    hisproj
    ectbeaf fectedifCablewer e
    c. ComputetheNPVf orthisproj
    ect. touseMACRSdepr eciati
    onf ort
    axpurposesandthemachi nef el
    lintot
    he
    7-y
    earMACRScl ass?( i
    ncrease decreasenotaffected)Ci r
    clethe
    ccxci
    . Whi tehal
    lCo.hast heopportuni
    tytoint
    roduceanewpr oduct.Whitehal
    l appropr
    iat
    eanswer.
    expectstheproj
    ecttosellfor$40andt ohaveper-unitvari
    ablecostsof$27
    andannualcashfixedcostsof$1,500,
    000.Expectedannualsal esvol
    umei s NetCashFl ow, NPV&PI
    ccxci
    v
    200,000unit
    s.Theequi pmentneededt obringoutt henew pr oductcosts . Zenexisconsideri
    ngthepurchaseofamachine.Dat
    aar
    easfol
    lows:
    $3,500,
    000,has a f our-
    yearlif
    e and no salvage v al
    ue,and woul d be Cost $240,000
    depreci
    atedonast r
    aight-
    li
    nebasis. Whit
    ehall
    '
    scut offrateis10% andi ts Useful
    li
    fe 10years
    i
    ncomet axratei
    s40%. Annualstr
    aight-
    li
    nedepreci
    ati
    on $? ??
    Expect
    edannual savi
    ngsincashoperat
    ioncosts $80,000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page95of95
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Addi
    ti
    onalworki
    ngcapi
    tal
    needed $100,
    000 d.Supposet hatselli
    ngt henewpr oducthasnocompl ementar
    yef fect
    sbut
    Zenex'
    scutof
    frat
    eis12%anditst
    axrat
    eis40%. thatFrank'sproductionengi neersanti
    cipatesomepr oduct
    ionproblemsin
    makingt henewpr oductandar enotconf i
    dentofthe$35estimateofper-
    Requi
    red: D,
    L&H9E unitvari
    ablecostsf ort henewpr oduct.Findtheamountbywhi chFrank'
    s
    a.Comput et
    heannualnetcashfl
    owsfortheinvest
    ment
    . esti
    mat eofper -
    unitv ariabl
    ecostcouldbei nerrorandtheinvestmentsti
    l
    l
    b.Comput et
    heNPVoft heproj
    ect. havear eturnatleastequal t
    ot he14%costofcapi tal
    .
    c. Computet
    heprof
    it
    abil
    it
    yindexofthepr
    oject.
    NetCashFl ow, NPV&I RR
    ccxcv ccxcv
    ii
    . Sei l
    erisconsideringt
    hepurchaseofamachine.Dat
    aar
    easfoll
    ows: . Acmeisconsi der
    ingt
    hepurchaseofamachi ne.Dat
    aar
    easf
    oll
    ows:
    Cost $2,000,
    000 Cost $160,
    000
    Usefulli
    fe 8year
    s Useful
    lif
    e 10year
    s
    Annual st
    rai
    ght-l
    inedepr
    eciati
    on $? ?
    ? Annualstrai
    ght-
    li
    nedepr
    eci
    ation $? ?
    ?
    Expectedannual savi
    ngsincashoperat
    ioncost
    s $750,000 Expect
    edannual savi
    ngsi
    ncashoper ati
    oncosts $33,
    000
    Additi
    onalworkingcapit
    alneeded $500,000 Acme'scutoffrat
    eis12%anditstaxrat
    ei s40%.
    Sei
    l
    er '
    scutoffrat
    eis12%andi t
    staxrat
    eis40%.
    Requi
    red: D,
    L&H9E
    Requi
    red: D,
    L&H9E a.Comput et
    heannual
    netcashf l
    owsf
    ort
    hei
    nvest
    ment
    .
    a.Comput et
    heannualnetcashfl
    owsfortheinvest
    ment
    . b.Comput et
    heNPVoft heproject.
    b.Comput et
    heNPVoft heproj
    ect. c. Computet
    heIRRoftheproject.
    c. Computet
    heprof
    it
    abil
    it
    yindexofthepr
    oject.
    Annual CashInflow, ARR,NPV, PI&I RR
    ccxcv
    ii
    i
    NetCashFl ow, NPV&Sensi ti
    vit
    yAnalysis . TheSunCor p.iscontempl ati
    ngt heacquisi
    tionofanautomaticcarwash.
    ccxcv
    i
    . FrankCo.hast heoppor tuni
    tytointr
    oduceanewpr oduct.Frankexpect
    s Thef ol
    lowingi nformati
    onisr elevant:
    thepr oductt osellfor$60andt ohav eper-uni
    tvar
    iabl
    ecost sof$35and  Thecostoft hecarwashi s$160, 000
    annualcashf ixedcost sof$4,000,000. Expectedannualsalesvolumeis  Theant icipatedrevenuefrom t hecarwashi s$100,000perannum.
    275,000uni ts.Theequi pmentneededt obri
    ngoutthenew pr oductcost
    s  Theusef ulli
    feofthecarwashi s10y ears.
    $6,000,000,has a f our-
    yearlife and no salv
    age value,and would be  Annual oper ati
    ngcostsar eexpect edtobe:
    depreciat edonast raight-
    li
    nebasis.Fr ank'
    scostofcapitali
    s14% andi t
    s Sal
    ar i
    es $30,000
    incomet axratei s40%. Uti
    li
    ties 9,
    600
    Waterusage 4,
    400
    Required: D,L&H9E Supplies 6,
    000
    a.Comput et heannualnetcashf l
    owsf ortheinvestment. Repairs/maintenance 10,000
    b.Comput et heNPVoft heproject.  Thef ir
    m usesst r
    aight-li
    nedepreciat
    ion.
    c. Supposet hatsomeoft he275,000uni tsexpectedtobesol dwouldbet o  Thesal vagevaluefort hecarwashi szer o.
    customer swhocur r
    entlybuyanot herofFrank'sproducts,
    theX-10,which  Thecompany 'scutoffpointsareasf ol
    lows:
    hasa$12per -
    unitcontri
    buti
    onmar gin.Findt hesalesofX-10t hatcan Payback 3y ear
    s
    Franklosepery earandstil
    lhavethei nvest
    menti nthenewpr oductret
    urn Account i
    ngr at
    eofr et
    ur n 18%
    atleastthe14%costofcapi tal.
    CMAEXAMI NATIONQUESTI ONS Page96of96
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nter
    nalrat
    eofr
    etur
    n 18% Salv
    agevalue 0 0 0
    I
    gnor
    eincometaxes. Esti
    matedli
    fe 3yrs 3yrs 1yr
    Thecompanyusesst
    rai
    ght
    -l
    inedepr
    eci
    ati
    onforal
    lcapi
    talasset
    s.
    REQUIRED: Bar
    fi
    eld
    a.Comput etheannualcashinflow. Required:
    (D) Horngren
    b.Comput ethenetpresentvalue. a.Comput et hepaybackper
    iod,netpr
    esentval
    ue,andaccrualaccount
    ing
    c. Computei
    nternalr
    ateofreturn. rateofr etur
    nwi t
    hini
    ti
    alinvest
    ment,f
    oreachproposal
    .Usear equi
    red
    d.Comput ethepaybackperi
    od. rateofreturnof14%.
    e. Computetheprof
    it
    abili
    tyi
    ndex. b.Rankeachpr oposal1,2,and3usi ngeachmet hodseparat
    ely.Which
    f. Shoul
    dthecarwashbepur chased? proposal i
    sbest?Why?
    ccci
    PROJECTEVALUATI ON&RANKI NG .
    (Pr esentv alue t ables needed t o answert his quest i
    on.)The Rut h
    ccxci
    x
    .EIFManuf act uringCompanyneedst oov er
    hauli t
    sdri
    l
    lpr
    essorbuyanew Companyhasbeenoper at i
    ngasmal llunchcount erf ortheconv enienceof
    one.Thef act shav ebeengat her
    ed,
    andar easf oll
    ows: empl oy ees.Thecount eroccupi esspacet hati snotneededf oranyot her
    CurrentMachi ne NewMachi ne businesspur pose.Thel unchcount erhasbeenmanaged byapar t
    -ti
    me
    PurchasePr ice,New $80, 000 $100,
    000 empl oy eewhoseannualsal aryis$3,000.Year l
    yoper ationshav econsi stently
    Currentbookv al
    ue 30,000 shownal ossasf oll
    ows:
    Overhaul needednow 40,000 Recei pts $20, 000
    Annual cashoper atingcosts 70,000 40,
    000 Expensesf orfood, supplies(i
    ncash) $19, 000
    Currentsalv agev alue 20,000 Salary 3,000 22,
    000
    Sal
    v agev aluei nfiv
    ey ears 5,000 20,
    000 NetLoss $(2,
    000)
    Acompanyhasof feredt osellRuthaut omat icv endingmachi nesf orat otal
    Requi
    red:(
    D) Hor
    ngren costof$12, 000.Sal est ermsar ecashondel i
    ver y.Theol dequi pmenthas
    Whichalt
    ernat
    ivei
    sthemostdesir
    ablewi
    thacurr
    entr
    equi
    redr
    ateofret
    urn zerodi sposal value.
    of20%?Showcomput at
    ions,
    andassumenot
    axes. Thepr edictedusef ullif
    eoft heequipmenti s10y ears,wi t
    hzeroscr apv al ue.
    Theequi pmentwi lleasi l
    yser vethesamev olumet hatt helunchcount er
    ccc
    .Gavi
    n and Al ex,baseballconsul
    tants,arei n need ofa mi crocomputer handled.Z cat eri
    ng company wi llcompl etely ser vice and suppl yt he
    net
    wor kfortheirst
    aff.Theyhav
    ereceivedthreeproposals,wi
    thr elat
    edfacts machi nes.Pr i
    cesandv ar i
    etyoffoodanddr inkwi llbet hesameast hoset hat
    asfoll
    ows: prevailedatt hel unchcount er.Thecat eri
    ngcompanywi llpay5per centof
    Proposal Pr oposal Pr oposal grossr ecei
    pt stot heRut hCompanyandwi llbearal lcost soff ood,r epai r
    s,
    A B C andsof orth.Thepar t
    -t
    imeempl oyeewi l
    lbedi schar ged.Thus,Rut h'
    sonl y
    I
    niti
    ali
    nv estmentinequi
    pment $90, 000 $90,000 $90, 000 costwi l
    lbet heiniti
    al outlayforthemachi nes.
    Annual cash i ncr
    ease in Consi deronl ythet woal ternati
    vesment i
    oned.
    operat
    ions:
    Year1 80,
    000 45,
    000 90,000 REQUI
    RED: Bar
    fi
    eld
    Year2 10,
    000 45,
    000 0 a.Whatist
    heannuali
    ncomedif
    fer
    encebet
    weenal
    ter
    nat
    ives?
    Year3 45,
    000 45,
    000 0 b.Computethepay
    backper
    iod.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page97of97
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    c. Comput e: percent,butcongr ess i


    s presentl
    y debati
    ng tax l
    egi
    slation thatwould
    1.Thenetpr esentv alueifrel
    evantcostofcapi t
    alis20per cent. dramat i
    call
    yincr
    easether at
    e.Ifthelegisl
    ati
    onispassedi twouldgointo
    2.I nter
    nalrateofret urn. affectint wo year
    s( aft
    erthe Jonathan Co.has clai
    med t wo year
    s of
    d.Managementi sv er
    yuncer tai
    naboutt heprospectiverevenuef rom the depreciati
    on).
    vending equipment.Suppose t hatt he gross receipt
    s amount ed to Method Met hod2 Di ff
    er ence
    $14,000insteadof$20, 000.Repeatthecomput ati
    oninpartc. 1. 1
    e. Whatwoul dbet hemi nimum amountofannual grossrecei
    pt sfr
    om t he Year1 $30,
    000 $10, 000 $(20,000)
    vendingequipmentt hatwoul djusti
    fymaki ngtheinvestment ?Show Year2 $40,
    000 $15, 000 $(25,000)
    comput at
    ions. Year3 $10,
    000 $25, 000 $15, 000
    Year4 $10,
    000 $25, 000 $15, 000
    Pay back, NetPr esentValue&Pr ofit
    abili
    tyIndex Year5 $10,
    000 $25, 000 $15, 000
    ccci
    i
    .(Pr
    esentv aluetablesneededt oanswert hisquest i
    on.)XYZCo.i sinterest ed
    inpur chasingast at
    e-of-
    the-artwi dgetmachi nef ori t
    smanuf acturi
    ngpl ant. REQUIRED: Bar
    fi
    eld
    Thenew machi nehasbeendesi gnedt obasi call
    yel i
    minateal ler rorsand Howhighwouldtaxr
    atesneedtobeint
    woyear
    sfort
    heJonat
    hanCo.t
    obe
    defectsint hewi dget-
    maki ngpr oduct i
    onpr ocess.Thenewmachi newi l
    lcost i
    ndif
    fer
    entbet
    weendepreci
    ati
    onMet
    hod2anddepr
    eci
    ati
    onMet
    hod1bel
    ow?
    $150,000,andhav easal vagev al
    ueof$70, 000att heendofi tssev en-
    y ear
    usefullif
    e.XYZhasdet er
    mi nedt hatcashi nfl
    owsf ory ears1t hrough7wi ll be ccci
    . v
    . XLCor p.isconsider
    ingani nvestmentt hatwillrequir
    eani ni
    ti
    alcash
    as fol l
    ows:$32, 000;$57, 000;$15, 000;$28, 000;$16, 000;$10, 000,and outl
    ayof$200,000topurchasenon- depreci
    ableassets.Theprojectpr
    omises
    $15,000,r espectivel
    y.Mai nt enancewi l
    lber equired iny ears3 and 6 at toreturn$60,
    000pery ear(aft
    er-
    tax)f oreightyearswithnosal vageval
    ue.
    $10,000and$7, 000r espectively.XYZusesadi scountrateof11per centand Thecompany '
    scostofcapital
    is11per cent.
    want sprojectstohav eapay backper iodofnol ongert hanfi
    v ey ears. (Pr
    esentv al
    uet abl
    esneeded t o answert hisquest i
    on.)Thecompanyi s
    uncertai
    naboutit
    sestimateoftheli
    f eexpectancyoftheproject
    .
    REQUIRED: Bar
    fi
    eld
    a.Comput ethenetpresentvalueofthenewmachine. REQUIRED: Barf
    ield
    b.Comput ethefi
    rm'sprofi
    tabil
    it
    yindex. How manyy ear
    smustt hepr ojectgenerat
    ethe$60,000peryearr
    etur
    nf or
    c. Computethepaybackperiod. t
    hecompanyt oatleastbeindif
    ferentabouti
    tsaccept
    ance?(
    Donotconsider
    d.Ev al
    uat
    ethisi
    nvestmentpr oposalforXYZCo. t
    hepossibi
    l
    ityofpart
    ialyearr
    eturns.) Barf
    ield
    Poi ntOfIndi ff
    erence INFLATI ON
    ccci
    i
    i
    . ( Pr esentv aluetablesneededt oanswert hi
    squest i
    on. )Manager soft he Ef f
    ectofInfl
    ati
    ononI nvestmentDeci si
    on
    Jonat hanCo.r eali
    zethatt hepresentv alueofthedepr eciationt axbenefitis cccv
    .Ranchero Companyi s ev al
    uati
    ng a capitalbudgeti
    ng pr oposalthatwi l
    l
    aff
    ect edbyt hedi scountr at
    e,thet axr ate,andt hedepr eciati
    onr ate.They requir
    eani ni
    ti
    alcashinv estmentof$100,000.Thepr ojectwillhav
    ea3- year
    haver ecentlypur chasedamachi nef or$100,000andt heyar et r
    yingtodeci de li
    fe.Thenetaf ter
    -taxcashi nfl
    owsf rom theproject
    ,beforeanyadj ust
    ment
    whichdepr eciationmet hodtouse.Ther ear eonlytwoal ternativesav ai
    l
    abl e, fortheef
    fectsofinflat
    ion,areexpectedtobeasf oll
    ows:
    andt heymustmakeani r
    revocableselectionofonemet hodort heotherright Year Unadj ustedEsti
    mat eofCashI nfl
    ows
    now.Theyhav enouncer tai
    ntyaboutt hecompany '
    sdiscountr ate(itis10 1 $50,000
    percent )
    ,butt heyar ehighlyuncertainaboutt hedirecti
    onoff uturetaxrates. 2 40,000
    Thecompany 'suncer t
    aintystemsf rom thefactthattheexi sti
    ngt axrateis30
    CMAEXAMI NATIONQUESTI ONS Page98of98
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    3 30,
    000 from theproject
    ,befor
    eanyadj ust
    mentf ortheeffect
    sofi nf
    lat
    ionori ncome
    Nosal
    vagei
    sexpectedatt
    heendoftheproject
    .Theant i
    cipat
    edi
    nfl
    ati
    on taxes,areexpectedtobeasf ol
    l
    ows:
    r
    atei
    s10%eachyear
    .Thecompany
    'scostofcapi
    tal
    rat
    eis16%. Year UnadjustedEsti
    mat eofCashI nf
    lows
    1 $25,000
    Requi
    red: Car
    ter&Usr
    y 2 27,
    000
    3 29,
    000
    (1)Comput et he estimated cash i nfl
    ow foreach y ear,adjust
    ed forthe 4 23,
    000
    antici
    patedef f
    ectofinfl
    ation. 5 20,
    000
    (2)Determinet henetpr esentv alueoft hecashf l
    owsbef oreandaf t
    erthe 6 15,
    000
    adjustmentf ortheanti
    cipatedeffectsofinf
    lat
    ion. The expected salvage val
    ue oft he propertyi
    s zero. Cash i nfl
    owsar e
    (Thepresentv aluesof$1@ 16%att heendofy ears1,2,and3r especti
    vel
    y expectedtoincreaseattheanti
    cipatedinfl
    ati
    onrateof4%eachy ear.
    are.862,.743,and. 641.Thepr esentvalueofanannui tyof$1@ 16%f or3
    year
    si s2.246.) Required: Carter&Usry
    Comput etheinfl
    ati
    onadjust
    edaf t
    er-t
    axcashi nfl
    ow from theproposalfor
    Est imatingPretaxCashInflowsWi thI
    nf l
    ation eachy ear,andtheexcessoft
    otalnetcashinfl
    owsov erthei
    niti
    alcashoutl
    ay.
    cccv
    i
    . SpeediCor porati
    oni sconsideringacapi talexpenditurepr oposalwhich (Use t he MACRS depr eci
    ati
    on rates provi
    ded bel ow to comput et ax
    willrequi
    reaniniti
    alcashoutlayof$50, 000.Thepr ojectl
    ifeisexpect edtobe depreciati
    on,androundthepri
    ce-
    leveli
    ndextothreedecimalplaces.
    )
    6y ears.Theest i
    matedsal v
    agev aluefortheequi pment( basedont oday'
    s Year MACRS5- yearRecoveryRate
    mar ketpriceforsimilarused6- yearol dequipment )is$2, 500. Est i
    mated 1 0.
    200
    annual netcashinfl
    owsf rom operati
    onsdur i
    ngt heli
    feoft hepr ojectf
    oll
    ow: 2 0.
    320
    Year EstimatedAnnual CashInfl
    ow 3 0.
    192
    1 $10, 000 4 0.
    115
    2 15, 000 5 0.
    115
    3 15, 000 6 0.
    058
    4 15, 000 1.
    000
    5 10, 000
    6 5,000 COSTOFCAPI TAL
    cccv
    ii
    i
    . Moll
    oyCompanywi shestocomput eawei ghted-
    aver
    agecostofcapital
    Requir
    ed: Cart
    er&Usr y foruse in eval
    uati
    ng capi
    talexpendit
    ure proposal
    s. Earnings,capi
    tal
    Comput ethe excess of cash inf
    lows over cash out
    flows assuming str
    uct
    ure,andcur
    rentmarketpr
    icesofthecompany '
    ssecur
    it
    iesare:
    managementexpectsaconstant4%rateofi
    nflat
    iondur
    ingthe6-yearper
    iod.
    (Roundyourpr
    icel
    eveli
    ndextothreedeci
    malplaces.
    ) Ear
    nings:
    Earningsbeforei
    nter
    estandt
    ax $400,
    000
    Ef f
    ectofInfl
    ati
    onandTax esonInvestmentDecisi
    on I
    nterestexpenseonbonds 100,
    000
    cccv
    ii
    . Wei ghoutCompanyi seval
    uatingacapi t
    alexpendit
    urepr oposalthatwil
    l Pretaxearni
    ngs $300,
    000
    requi
    reaninit
    ialcashinvest
    mentof$100, 000.Thepr ojectwillhavea6-year I
    ncomet ax(40%) 120,
    000
    lif
    e; however,thepr oper
    tywi l
    lquali
    fyas5- yearproper t
    yf orincome-tax Aftertaxearni
    ngs $180,
    000
    depreci
    ati
    onpur poses.Theincomet axrateis40%.Theannualcashi nfl
    ows Preferredst
    ockdivi
    dends 75,
    000
    CMAEXAMI NATIONQUESTI ONS Page99of99
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Ear
    ningsavail
    abl
    etocommonst
    ockhol
    der
    s $105,
    000
    Commonst ockdivi
    dends 50,
    000
    i
    v
    Ret
    ainedearni
    ngs $55,000
    Costofnewmachine $75,
    000
    Capit
    alst r
    uctur
    e: Less:Aft
    er-
    taxi
    nfl
    owfr
    om ol
    dmachi
    ne(
    $10,
    000x.
    60) 6,
    000
    Mor t
    gagebonds, 12%,20y ear
    s $500,
    000 $69,
    000
    Preferredst
    ock,15%,$100par 500,
    000
    Commonst ock,nopar,25,000shar
    es 300,
    000 v
    . Answer( C)iscor r
    ect.Theamountoft heaf ter-t
    axcashoper ati
    ngsav ingsi s
    Retainedearni
    ngs(equityofcommonstockhol
    der
    s) 700,
    000 $90,000[ $150,
    000pr et
    axsav ingsx( 1.0-. 40)].Thepr oceedsf rom saleof
    $2,
    000,
    000 exist
    ingequi pmentar egivenas$100, 000.Thet axbenef itfrom saleof
    exist
    ing equipmenti s $104,000 [($360,000 car ryi
    ng amount-$100, 000
    Mar
    ketpri
    ceofthecompany
    'ssecur
    it
    ies: proceeds)x40%t axrate].
    Pref
    err
    edstock $100 Answer( A)isincorrectbecauset hesaleofexi stingequipmentwi llr
    esultina
    Commonst ock 30 l
    osst hatwi l
    lpr
    oducea$104, 000t axbenef i
    t.Answer( B)isincorr
    ectbecause
    $60,000i sthet axont he$150, 000ofnetpr ofitari
    singfrom the$150, 000
    Requi
    red: Cart
    er&Usry costsavings.Also,the$100,000ofpr oceedsf rom theequipmentsal eshoul d
    Deter
    minethecompany
    'scostofcapi
    talt
    othenear
    esthundr
    edth ofa notber educedbyt he40% t axr ateto$60, 000.Answer( D)i sincorrect
    per
    cent. because$60, 000i sthet axont he$150, 000ofneti ncomear i
    singfrom t he
    $150,000 costsav i
    ngs.Al so,$40, 000 equal st he tax on $100,000,and
    $156,000equal s60%of$260, 000.
    i v
    i
    . ($85,000-54,
    500)=$30,500-$25,000=$5,500lossx0.
    4=$2,
    200t
    ax
    savingsfr
    om l
    osspl
    us$25,000pr
    oceeds=$27,
    200. Costofnewmachi ne $75,
    000
    Less:Trade-
    inal
    l
    owance 10,
    000
    i
    i
    . Taxes=($12,
    000-$4,
    000)x0.
    40=$3,
    200 $65,
    000
    Cashfl
    ow=$12,000-$3,
    200=$8,
    800
    v
    ii
    .Answer( C)iscor rect.Theinv estmentr equiredincludesi ncreasesi nwor king
    i
    ii
    .Answer( C)iscorrect.Theol dmachi nehasabookv alueof$10,000[ $15,
    000 capital( e.
    g.,addi t
    ionalr eceivables and i nv
    entories r esulti
    ng f r
    om t he
    cost-5( $15,000cost÷15y ears)depreciati
    on].Thelossont hesaleis$4,000 acquisiti
    onofanew manuf acturi
    ngpl ant )
    .Theaddi t
    ionalwor ki
    ngcapi talis
    ($10,000-$6, 000cashr eceived),andthet axsav i
    ngsf rom thelossis$1,600 anini t
    ialcostoft hei nvestment ,butonet hatwi l
    lber ecovered( i.e.
    ,ithasa
    (40% x$4, 000).Thus,t otalinfl
    owsar e$7, 600.Theonl youtflow isthe salvagev alueequalt oi t
    si ni
    tialcost)
    .Lawsoncanusecur r
    entl iabil
    it
    iest o
    $25,000pur chasepr iceoft henew machi ne.Thenetcashi nvestmentis fundasset st otheext entof10%ofsal es.Thus,t het otalinit
    ialcashout lay
    therefore$17,400( $25,000-$7, 600). will
    be$4. 6mi l
    li
    on{ $4mi ll
    ion+[ (30%-10%)x$3mi l
    li
    onsal es]}.
    Answer( A)isincorrectbecause$19, 000ov erlookst hetaxsavingsf rom t
    he Answer( A)i si ncorrectbecause$3. 4 mi l
    l
    ion deduct st hei nv estmenti n
    l
    ossont heol dmachi ne.Answer( B)isincorrectbecause$15, 000isobt ai
    ned workingcapi talfrom t hecostofequi pment .Answer( B)isi ncorrectbecause
    bydeduct i
    ngt heol dbookv aluef r
    om t hepur chasepr ice. Answer( D)is $4.3mi l
    l
    ionequal s$4mi ll
    ionpl us10%of$3mi ll
    ion.Answer( D)isi ncorrect
    i
    ncor rectbecause t he neti nvestmenti sl ess than $25, 000 given sal
    es because $4. 9 mi lli
    on fail
    st o considert he fi
    nancing of33- 1/3% oft he
    proceedsf rom theoldmachi neandt het axsav i
    ngs.
    CMAEXAMI NATI ONQUESTI ONS Page100of100
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    i
    ncr
    ement
    alcur
    rentasset
    swi
    thaccount
    spay
    abl
    e.

    v
    ii
    i.
    Answer( C)i
    scor rect.Forcapitalbudget i
    ngpur poses, t
    heneti nvestmentist henetout l
    ayorcashr equir
    ement .Thisamounti ncl
    udest hecostoft henewequi pment ,
    mi nusanycashr ecoveredfrom t het r
    adeorsal eofexi sti
    ngasset s.Thei nvestmentr equiredal soincl udesf undst oprovidef orincreasesi nwor kingcapi tal,f
    or
    exampl e,theaddi ti
    onalreceivablesandi nventoriesresulti
    ngf rom theacquisiti
    onofanewmanuf acturingpl ant.Theinvestmenti nwor ki
    ngcapi t
    alistreatedasan
    init
    ialcostofthei nvestment,althoughi twi l
    lber ecoveredatt heendoft hepr oj
    ect( i
    tssalvagev alueequal si t
    siniti
    alcost)
    .ForKl ine,t
    headdi t
    ionalcurrentasset swill
    be30%ofsal es, butcurrentli
    abi l
    i
    tiescanbeusedt ofundasset stot heextentof10%ofsal es.Thus, thei ni
    ti
    alinvestmentinwor ki
    ngcapi talwillequal20%oft he$6
    mi l
    li
    oni nsal
    es, or$1,200,000.Thet otaliniti
    alcashout l
    aywillconsistofthe$8mi l
    l
    ioninnewequi pmentpl us$1,200,000inwor ki
    ngcapi t
    al,atotalof$9. 2milli
    on.
    Answer( A)i
    si ncorrectbecause$6. 8mi ll
    ionsubt ractedtheneti nvestmenti nwor ki
    ngcapi talfrom thecostoft heequipment .Answer( B)isincor r
    ectbecause$8. 6
    mi l
    li
    onassumescur rentassetswi llincreaseby10%ofnewsal esbutthatcur r
    entl i
    abi
    li
    tieswi l
    lnotchange.Answer( D)isincorrectbecause$9. 8mi ll
    i
    oni gnor esthe
    financingofincrement alcurr
    entasset swi thaccount spay able.
    i
    x
    .(
    $40,
    000-$30,
    000)x0.
    40=$4,
    000

    x. Answer( A)iscorr
    ect.Theconceptofpr esentvaluegivesgreat
    erv al
    uetoinfl
    owsrecei
    vedearli
    erinthestr
    eam.Thus,t
    hedecli
    ninginf
    lowswoul
    dbesuper i
    ort
    o
    i
    ncreasinginfl
    ows,oreveninf
    lows.
    Answer( B)isi
    ncor
    rectbecauseiti
    nvolv
    esl oweri
    nf l
    owsintheearl
    ieryear
    s.Answer(
    C)isincor
    rectbecausei
    tinv
    olv
    esl
    owerinf
    lowsintheearl
    i
    ery
    ears.Answer(
    D)i
    s
    i
    ncorrectbecausei
    tinvolv
    eslowerinf
    lowsint heearli
    ery
    ears.

    xi
    .Answer( C)iscorr
    ect.Theincreaseinpre-
    taxnetprofi
    tis140,000(400,000cashsalesi
    ncrease-180, 000nondepreci
    ati
    onexpensesincr
    ease-80,000depr
    eciat
    ion)
    .
    Thus,t
    axeswill
    increaseby47,600(34%x140, 000)
    ,andtheincreaseinnetcashinf
    lowswillbe172,400( 400,
    000-180,
    000-47,600).
    Answer(A)isi
    ncorrectbecause92,400equalsthei
    ncreaseinafter-
    taxnetprof
    it
    .Answer(B)isincorrectbecause140,
    000istheincr
    easeinpre-
    taxnetpr
    ofi
    t.Answer
    (D)i
    sincor
    rectbecause220,000equalscashsalesminusexpensesot herthandepr
    eciat
    ion.

    xi
    i
    .Answer( D)i
    scor rect.Depreci
    ati
    onexpenseisnotacashout f
    lowandisnotconsider
    edinthecashanalysi
    sexceptfori
    tseff
    ectsontaxespaid.Thus,theexpected
    annual
    cashflowis$14, 000{(1.
    0-.4taxrat
    e)[
    $50,000cashsal
    es-$10,
    000fi
    xedcost-( .
    4x$50,000)vari
    abl
    ecosts-$5,
    000depreci
    ati
    on]+$5,000depreciat
    ion}
    .
    Answer(A)i
    si ncorrectbecause$15,000isthepre-t
    axincomefrom t
    heproject
    .Answer( B)i
    si ncor
    rectbecause$9,
    000incl
    udesdepreci
    ationasacashout f
    low.
    Answer(C)i
    sincor r
    ectbecause$19,000equalsexpect
    edannualcashf
    lowplusdepreci
    ati
    on.
    xi
    i
    i
    .$50,
    000x5=$250,
    000x(
    1-0.
    4)=$150,
    000netcashf
    low

    xi
    v.Answer( B)iscor r
    ect.Thepr ojectwi
    llhavean$11, 000before-taxcashinfl
    owf r
    om oper
    ationsint
    hetenthy ear($40,000-$29,
    000).Also,$9,
    000wi l
    lbegenerated
    from thesal
    eoft heequipment .Theentire$9,000willbetaxablebecauset hebasisoftheassetwasr educedt ozeroi nt
    he7thyear.Thus,taxableincomewillbe
    $20,000($11,000+$9, 000),leavinganetafter-
    taxcashinfl
    owof$12, 000[(1.0-.4)x$20,000].Tot
    his$12,000mustbeaddedt he$12,000tiedupinwor ki
    ngcapital
    ($7,
    000+$5, 000).Thet otal
    netcashf l
    owi nthe10thy earwi
    lltheref
    orebe$24,000.
    Answer( A)i
    si ncorr
    ectbecause$32, 000omi tsthe$8,000outfl
    owf orincomet axes.Answer(C)isi
    ncorr
    ectbecauset axeswil
    lbe$8,000,not$12,000.Answer(D)is
    i
    ncor r
    ectbecause$11, 000ist henetoperati
    ngcashf l
    ow.
    CMAEXAMI NATI ONQUESTI ONS Page101of101
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    xv
    .Answer( C)iscorrect.Thet axbasisof$75,000andt he$40,000costtoremov ecanbewr i
    ttenoff
    .Howev er,the$10,000scr apvalueisacashi nf
    low.Thus,the
    taxablel
    ossis$105, 000($75,000lossondisposal+$40, 000expensetoremov e-$10,000ofi
    nf l
    ows).Ata40%t axrate,the$105,000losswi l
    lproduceataxsavings
    (i
    nflow)of$42,000.Thef inalcashflowswillconsistofanout fl
    owof$40,000( costtoremove)andi nfl
    owsof$10, 000( scr
    ap)and$42, 000(taxsavings)
    ,oranet
    i
    nf l
    owof$12,000.
    Answer(A)isincorrectbecause$45,000ignoresincomet axesandassumest hatthelossondisposalinv
    olvesacashi nf
    low.Answer( B)isincor
    rectbecause$27,000
    assumest hatt
    helossondi sposal
    involv
    esacashi nflow.Answer( D)i
    sincor
    rectbecause$(18,000)i
    gnoresthetaxlossondi sposal
    .

    xv
    i.Answer( C)iscorrect.Thetaxbasisof$150,000andthe$80, 000costtor emovear ededucti
    bleexpenses,butthe$20,000scr apvaluei
    sanof f
    sett
    ingcashinfl
    ow.
    Thus,thetaxablelossis$210,000($150,000+$80,
    000-$20, 000)
    .Ata40%t axrate,t
    he$210,000l osswil
    lpr
    oduceat axsav i
    ngs(inf
    low)of$84,
    000.Accordi
    ngly
    ,the
    fi
    nalcashflowswi llconsi
    stofanoutflowof$80,
    000(costtor emove)andinfl
    owsof$20, 000(scrap)and$84,000(t
    axsav ings)
    ,anetinfl
    owof$24,000.
    Answer( A)isincorr
    ectbecause$90,000assumest hatthelossondi sposalisacashi nf
    low.Italsoignor
    esincomet axes.Answer( B)isi
    ncorr
    ectbecause$54,000
    assumest hatthelossondi sposal
    involv
    esacashinfl
    ow.Answer( D)isi
    ncorrectbecause$(36,000)assumesthatthetaxbasisis$0.
    xv
    ii
    .$50,
    000x40%=$20,
    000
    xv
    ii
    i
    .$80,
    000x40%=$32,
    000
    xi
    x

    Addit
    ionaldepreci
    ati
    on on t
    he new $(
    40,
    000)
    machine
    Lossonsaleofoldmachine (45,
    000)
    Operati
    ngcostsavi
    ngs 125,000
    I
    ncreaseini
    ncome $40,000
    xx
    .(
    A)($8,000x.
    97087)+(
    $12,
    000x.94260)+($10,
    000x.
    91514)+(
    $15,
    000x.
    88849)=
    $7,767+11,311+9,
    151+13,
    327=$41,556
    xx
    i
    .$27,
    000x0.
    641(
    PVI
    F,n=3,
    16%)=$17,
    307
    xx
    ii
    .$6,
    000x0.
    404(
    PVI
    F,n=8,
    12%)=$2,
    424
    xx
    ii
    i
    .
    Revenues $48,100
    Less:Vari
    abl
    ecosts (
    16,000)
    Fi
    xedout-of-
    pocketcost
    s (
    10,000)
    Annualcashinfl
    ows $22,000
    PVAF,n=8, 12% x4. 968
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page102of102
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Pr
    esentv
    alue $109,
    296

    xxi
    v. Answer( D)iscor rect
    .Ini
    ti
    all
    y,t
    hecompanymusti nvest$105,
    000int
    hemachi ne,consist
    ingoftheinvoicepri
    ceof$90,
    000,t
    hedeliv
    erycostsof$6,000,andthe
    i
    nstal
    lat
    ioncostsof$9, 000.
    Answer(A)isincorrectbecause$(85,
    000)err
    oneouslyincl
    udessalv
    agevaluebutignoresdeliv
    eryandinstall
    ati
    oncost
    s.Answer(B)isincor
    rectbecause$(90,
    000)
    i
    gnorestheoutlaysneededf ordeli
    ver
    yandinstal
    l
    ationcosts,bot
    hofwhichareani nt
    egralpartofprepar
    ingthenewassetforuse.Answer(C)isincorr
    ectbecause
    $(
    96,000)fai
    l
    st oincludeinst
    all
    ati
    oncost
    sinthetotal.

    xxv
    . Answer( A)iscorrect
    .Thecompanywi llrecei
    venetcashi nf
    lowsof$50peruni t(
    $500sel li
    ngpr i
    ce-$450ofv ariablecost s)
    ,oratotalof$100,
    000pery ear.This
    amountwillbesubjecttotaxat
    ion,but,f
    ort hefir
    st5y ears,therewi l
    lbeadepr eciati
    ondeduct ionof$21,000pery ear( $105,000costdivi
    dedby5y ears).Theref
    ore,
    deducti
    ngthe$21,000ofdepr eciati
    onexpensef r
    om the$100, 000ofcont r
    ibuti
    onmar gi
    nwi l
    lresulti
    ntaxabl
    eincomeof$79, 000.Aft
    erincometaxesof$31, 600
    ($79,
    000x40%) ,t
    henetcashf l
    owi nthethirdyearis$68,400( $100,000-$31,600).
    Answer(B)isincorr
    ectbecause$68, 000deduct ssal
    vagev al
    uewhencal cul
    atingdepr eci
    ationexpense,whichi
    snotr equi
    redbyt hetaxlaw.Answer(C)i sincor
    rect
    because$64,200assumesdepr eciat
    ionisdeductedfortaxpur posesov er10y earsratherthan5y ears.Answer(D)isi ncorrectbecause$79,000i
    staxableincome.

    xxv
    i. Answer( D)iscorrect.Thecompanywi l
    lreceivenetcashinflowsof$50peruni t($500sel lingpr ice-$450ofv ar
    iablecosts)
    ,oratotalof$100,
    000pery ear.Thi
    s
    amountwi l
    lbesubjectt otaxati
    on,aswillt
    he$5, 000gainonsal eoftheinv
    estment,bringi
    ngt axabl eincomet o$105,000.Nodepr eci
    ati
    onwi l
    lbedeductedinthetent
    h
    yearbecausetheassetwasf ull
    ydepreciat
    edaf t
    er5y ears.Becausetheassetwasfullydepr eciated( bookvaluewaszer o),t
    he$5,000salvageval
    uereceivedwouldbe
    full
    ytaxabl
    e.Afteri
    ncomet axesof$42,000($105,000x40%) ,t
    henetcashf l
    owinthet enthy eari s$63,000($105,000-$42,000).
    Answer( A)i
    si ncor
    rectbecause$100, 000ov erl
    ookst hesalvageproceedsandthet axest obepai d.Answer( B)isi
    ncorrectbecause$81,000miscalcul
    atesincome
    taxes.Answer(C)isincorrectbecause$68,400assumest hatdepreci
    ati
    onisdeducted; i
    talsoov erl
    ookst herecei
    ptofthesalvageproceeds.

    xxv
    ii. Answer(D)iscor rect.Deli
    veryandinstal
    lati
    oncostsareessentialt
    oprepari
    ngt hemachineforit
    sintendeduse.Thus, t
    hecompanymusti ni
    ti
    all
    ypay$210,000for
    themachine,consisti
    ngoft heinvoicepriceof$180,
    000,thedeli
    v er
    ycostsof$12,000,andthe$18,000ofi nstal
    lati
    oncost
    s.
    Answer(A)isincorrectbecause$( 170,000)incl
    udessalvagevalueandignoresdeliver
    yandinst
    allat
    ioncost s.Answer(B)i
    sincor
    rectbecause$(
    180,000)i
    gnorest
    he
    outl
    aysneededf ordeliveryandinstal
    lati
    on.Answer(C)isincor
    rectbecause$(192,000)excl
    udesinstal
    lat
    ioncost s.

    xxv
    iii
    .Answer( A)iscorrect
    .Thecompanywi l
    lreceivenetcashinflowsof$50peruni t($500sel l
    i
    ngpr i
    ce-$450v ar
    iabl
    ecost s),at ot
    alof$200,000pery earf
    or4,000
    unit
    s.Thisamountwi l
    lbesubjecttot
    axati
    on.Howev er,f
    orthefirst5year
    s,adepreciati
    ondeduct i
    onof$42,000pery ear($210,000cost÷5y ears)wi
    llbeavai
    lable.
    Thus,annualt
    axableincomewi l
    lbe$158,000( $200,000-$42,000).Ata40%t axrate,i
    ncomet axexpensewil
    lbe$63, 200,andt henetcashinflowwillbe$136,800
    ($200,
    000-$63,200).
    Answer(B)isincorr
    ectbecause$136,000resultsfrom subt
    racti
    ngsalvagevaluewhencal culati
    ngdepreci
    ati
    onexpense.Answer( C)isincor
    rectbecause$128,400
    assumesdepreciati
    onisrecognizedover10y ears.Answer( D)i si
    ncorr
    ectbecause$107, 400assumest hatdepreciati
    onisr ecognizedover10y earsandthati t
    requi
    resacashoutlay.

    xxi
    x. Answer( D)i
    scorr
    ect.Thecompanywil
    lrecei
    venetcashi
    nfl
    owsof$50peruni
    t($500sel
    l
    ingpri
    ce-$450ofvar
    iabl
    ecost
    s),
    atot
    alof$200,
    000peryearfor4,
    000
    uni
    ts.Thisamountwil
    lbesubjectt
    otaxat
    ion,aswil
    lthe$10,
    000gai
    nonsaleoft heinv
    est
    ment,resul
    ti
    ngi
    ntaxablei
    ncomeof$210,
    000.Nodepreci
    ati
    onwi l
    lbe
    CMAEXAMI NATIONQUESTIONS Page103of103
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    deduct
    edint hetent
    hy earbecauset heassetwasful
    lydepreciat
    edafter5years.Becausetheassetwasf ull
    ydepreci
    ated( bookvaluewas$0),t
    he$10,000receiv
    ed
    assalvagevalueisful
    lyt axable.At40%,t hetaxon$210,000i s$84,000.Aft
    ersubt r
    acti
    ng$84, 000oftaxexpensefrom t he$210,000ofinf
    lows,t
    heneti nfl
    ows
    amountto$126,000.
    Answer(A)isincorr
    ectbecause$200, 000overl
    ooksthesal
    v ageproceedsandt hetaxestobepai d.Answer(B)i
    sincorrectbecause$158,
    000equalsannualtaxable
    i
    ncomef oreachofthef i
    rst5y ears.Answer(C)isi
    ncorr
    ectbecause$136,800ist heannualnetcashinfl
    owinthesecondt hr
    ought hefi
    ft
    hyear
    s.

    xxx. Answer( B)iscorrect


    .Whenannualcashinfl
    owsar euniform,thepaybackperiodiscalculat
    edbydivi
    dingtheini
    ti
    ali
    nvestment($210,
    000)byt
    heannualnetcash
    i
    nfl
    ows( $136,
    800).Divi
    ding$210,
    000by$136,800producesapay backperiodof1.54y ear
    s.
    Answer(A)isincorr
    ectbecause1.05year
    sfailstosubtractincometaxes.Answer( C)isincorr
    ectbecause1.33yearsi
    ncludestaxabl
    eincomei
    nthedenomi nat
    or
    i
    nsteadofcashflows.Answer(D)isi
    ncorr
    ectbecause2.22y earssubtr
    actsdepreciat
    ionfrom cashfl
    ows.

    xxxi
    . Answer( C)iscorr
    ect.Theaccounti
    ngrat
    eofretur
    nmet hod(ARR)comput
    esanappr
    oxi
    mat
    erat
    eofr
    etur
    nwhi
    chi
    gnor
    est
    het
    imev
    alueofmoney
    .Iti
    scomput
    ed
    asfoll
    ows:
    ARR=expect edi
    ncreaseinneti
    ncome Av er
    ageinvest
    ment .
    Theref
    ore,
    $40,000(asstatedinpr
    oblem)i
    stheexpect
    edincreasei
    nannuali
    ncome.
    xx
    xii
    .
    [$16,
    000–(
    $80,
    000/
    8)]
    /$80,
    000=7.
    5%
    xx
    xii
    i
    .
    {$12,
    000–[
    ($30,
    000-$3,
    000)
    /5)
    ]}
    /$30,
    000=22%
    xx
    xiv
    .
    NetIncomeAfterTax(
    P280,
    000x20%) P 56,
    000
    Div
    ideby(1–0. 30) 0.
    70
    NetIncomebeforeTax P 80,
    000
    AddDepreci
    ati
    on 35,
    000
    CashFlowbeforeTax P115,
    000
    xx
    xv
    .
    NetIncomeaft
    erTax 7.
    5%ofInvest
    ment
    Depreci
    ati
    on 10.
    0%ofI nv
    est
    ment
    After
    -t
    axCashFlow 17.
    5%ofI nv
    est
    ment=P175,
    000
    Inv
    estment (
    P175,
    000 17.
    5%)
    =P1,000,
    000

    xxxvi
    .Answer( B)i
    scorrect.Pay backisthenumberofy earsrequir
    edtocompletethereturnoft heori
    ginali
    nvestment.Givenaperiodicconst
    antcashf low,thepayback
    peri
    odequal snetinvest
    mentdi vi
    dedbyt heconstantexpectedperiodi
    caft
    er-
    taxcashf low.Thedesi redpaybackper i
    odis4y ears,sotheconstantaf t
    er-t
    axannual
    cashflowmustbe$90, 000( $360,000÷4) .Assumingt hatthecompanyhassuf fi
    cientotherincomet opermitreali
    zati
    onofthef ullt
    axsavi
    ngs,depr eci
    ationofthe
    machinewi l
    lshi
    eld$60,000( $360,000÷6)ofincomef rom taxat
    ioneachyear
    ,anaf t
    er-t
    axcashsav ingsof$24,000(40%x$60,000) .Thus,t
    hemachi nemustgener ate
    anaddi t
    ional$66,
    000( $90,000-$24, 000)ofaf t
    er-t
    axcashsav i
    ngsfrom operati
    ons.Thi samounti sequivalentto$110,
    000[ $66,
    000÷( 1.
    0-. 4)]ofbefore-
    tax
    operat
    ingcashsav i
    ngs.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page104of104
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer( A)isincor
    rectbecause$90,000isthetot
    aldesi
    redannualaf
    ter
    -t
    axcashsavi
    ngs.Answer(C)isincorr
    ectbecause$114,000resul
    tsfrom addi
    ng,not
    subtract
    ing,
    the$24,
    000oft axdepreci
    ati
    onsavi
    ngst
    odeter
    minethemini
    mum annual
    aft
    er-
    taxoper
    ati
    ngsav
    ings.Answer(D)i
    sincor
    rectbecause$150,
    000assumes
    thatdepreci
    ati
    onisnottaxdeducti
    ble.

    xxxvi
    i.Answer( D)i
    scorrect.Thepay backperi
    odi scalculatedbydi vi
    dingcostbyt heannualcashi nfl
    ows,orcashsav i
    ngs.Toachieveapay backperiodof3y ears,t
    he
    annualincrementinnetcashi nf
    low gener
    atedbyt hei nvestmentmustbe$150, 000( $450,000÷3- yeartargetedpay backperi
    od).Thisamountequal sthetotal
    reducti
    onincashoper ati
    ngcost smi nusrel
    atedtaxes.Depr eciati
    onis$90,000($450, 000÷5y ears).Becausedepr eci
    ationisanoncashdeduct i
    bleexpense,i
    tshiel
    ds
    $90,000oft hecashsav i
    ngsf r
    om taxati
    on.Accordingly,$60,000($150,000-$90,000)oft headdi t
    ionalnetcashi nf
    lowmustcomef rom aft
    er-taxnetincome.Ata40%
    taxrate,$60,000ofafter-t
    axincomeequal s$100, 000( $60,000÷60%)ofpr e-t
    axi ncomef rom costsav i
    ngs,andt heout f
    lowfortaxesis$40,000.Thus,theannual
    reducti
    onincashoper ati
    ngcost srequir
    edis$190, 000($150, 000addit
    ionalnetcashi nfl
    owr equir
    ed+$40, 000taxout f
    low).
    Answer( A)isincor
    rectbecause$60, 000isafter-
    taxneti ncomef rom thecostsavings.Answer( B)isincorrectbecause$100,000isthepre-taxincomef rom t
    hecost
    savings.Answer(C)isincorrectbecause$150,000i gnoresthei mpactofdepreciat
    ionandi ncomet axes.
    xx
    xvi
    i
    i
    . $1,
    000,
    000/
    $200,
    000=5.
    0year
    s

    xxxi
    x.REQUI RED:Thepay backperi
    odiny ear
    s.
    DISCUSSION:( A)Thepay backperi
    odequal st
    heor i
    ginali
    nvestmentdivi
    dedbytheconstantnetcashinf
    lowperyear
    .Netcashinf
    lowperyeari
    s$2,000,andthe
    paybackperiodis2.5y ears($5,
    000investment÷$2,000).
    Annualrevenue $10,000
    CGS( 60%) (
    6,000)
    Cashf l
    owbef orefixedcosts $4,000
    Fi
    xedcost s (
    2,000)
    Annualnetcashi nflow $2, 000
    Answer(B)i sincorrectbecause5.00assumesa$10, 000invest
    ment .Answer(C)i
    sincorrectbecause2.
    00assumesa$10,
    000invest
    mentanda$5,000constant
    annualnetcashi nf
    low.Answer( D)isincorr
    ectbecause1.25equals$5,000di
    vi
    dedby$4,000.
    xl
    . St
    ep1: Cal
    cul
    atet
    hePVoft hecashf l
    ows:
    PVA5=$60,000(PVIFA10%,
    5)
    =$60,000(3.
    7908)
    =$227,448.

    St
    ep2:
    Cal
    cul
    atet
    heYear0out
    fl
    ow:
    Theout
    fl
    owatt=0isXwher
    e$227,
    448-X=$75,
    000.XorCF0=-
    $152,
    448.

    St
    ep3:
    Calcul
    atet
    her
    egul
    arpay
    back:
    Year CF Cumul
    ati
    veCF

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page105of105
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    0 -
    $152,
    448 -
    $152,448
    1 60,
    000 -
    92,
    448
    2 60,
    000 -
    32,
    448
    3 60,
    000 27,
    552
    4 60,
    000 87,
    552
    5 60,
    000 147,552

    Sot
    hepay
    backi
    s2+ =2.
    54y
    ear
    s.

    xl
    i
    .$600,
    000/
    $200,
    000=3y
    ear
    s
    xl
    i
    i
    .$15,
    000+$20,
    000+$25,
    000=$60,
    000or3y
    ear
    s
    xl
    i
    ii
    . Pay
    backper
    iod Answer
    :bDi
    ff
    :E

    Usi
    ngt
    heev
    encashf
    lowdi
    str
    ibut
    ionassumpt
    ion,
    thepr
    ojectwi
    l
    lcompl
    etel
    yrecov
    eri
    nit
    ial
    inv
    est
    mentaf
    ter30/
    35=0.
    86ofYear5:
    Pay
    back=4+ =4.
    86y
    ear
    s.

    xl
    i
    v
    . Pay
    backper
    iod Answer
    :cDi
    ff
    :M

    Pay
    back=5+ =5.
    928y
    ear
    s 6y
    ear
    s.

    xl
    v.REQUIRED:Thepay
    backperi
    odgi
    ventheannualcashfl
    ows.
    DISCUSSI
    ON:(B)Because$700wi
    llberecei
    vedinthef
    ir
    st2year
    s,onl
    y$300wi
    l
    lremai
    ntober
    ecov
    eredi
    nyear3.Thepay
    backper
    iodi
    sther
    efor
    e2.
    6year
    s[2y
    ear
    s
    +($300+$500)ofyear3]
    .

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page106of106
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer(A)i
    sincorr
    ectbecauseaft
    er2y ear
    s$300( $1,
    000-$700)remai nstoberecover
    ed.Answer(C)isincor
    rectbecausethepaybackperi
    odisdet
    ermi
    nedby
    addi
    ng2plusthepercentageofy
    ear3cashflowsnecessar
    ytorecoverthebalanceoft
    he$1,000or
    igi
    nali
    nvestment.Answer(D)isi
    ncorr
    ectbecause,
    att
    heendof3
    year
    s,$200(
    $1,200-$1,000)moret
    hantheorigi
    nal
    costwil
    lhaverecovered.
    xl
    vi
    .2+(
    $8,
    000/
    $15,
    000)=2.
    53
    xl
    vi
    i
    .4+$10,
    000/
    $30,
    000=4.
    33
    xl
    vi
    ii
    .$9,
    000+$12,
    000+$15,
    000+$9,
    000=$45,
    000or4y
    ear
    s

    xl
    i
    x. Answer( C)iscorrect.Thepaybackper iodisthenumberofy earsrequi
    redtocompl etethereturnoftheori
    ginali
    nvestment
    .Thi smeasureiscomputedbydividi
    ng
    thenetinv estmentrequi r
    edbytheav erageexpect ednetcashi nfl
    owt obegenerated.Thef ir
    ststepistodeterminetheannualcashflow.The$80,000costreducti
    on
    wil
    lbeof fsetbyt hetaxexpenseont hesav ings.Thefull$80,
    000,howev er
    ,wil
    lnotbet axablebecausedepreci
    ationcanbededuct edbeforecomputi
    ngincomet axes.
    All
    ocati
    ngt he$250,000costev enlyover5y earsproducesanannualdepr eci
    ati
    onexpenseof$50, 000.Thus,t
    axableincomewillbe$30,000($80,
    000-$50,000).Ata
    40%t axrat e,thetaxon$30, 000i s$12, 000.Thenetannualcashi nflow i
    stherefor
    e$68, 000($80,000-$12,000),andthepay backperi
    odi s3.
    68y ear
    s($250,000
    i
    nvestment÷$68, 000) .
    Answer( A)i sincor
    rectbecauset hepay backper i
    odi s3.68years.Answer(B)isincorr
    ectbecauset hepaybackper i
    odis3.68years.Answer( D)i
    sincorr
    ectbecause
    thepaybackper i
    odis3. 68year
    s.
    l
    . $200,
    000/
    ($125,
    000-$75,
    000+$15,
    000)=3.
    1

    l
    i
    . Answer( A)iscorrect.Thepay backperi
    odf oraninvest
    ment ,i
    gnori
    ngthet i
    mev al
    ueofmoney ,canbef oundbyaccumulati
    ngeachy ear'snetcashf l
    owsunt i
    lthe
    i
    nit
    ialinvest
    menti srecovered.Theamountaccumul atedaf t
    er3y earsi
    s$450,000.Thus,50%ofy ear4cashf l
    owsisneededt orecovertheini
    tiali
    nvestment
    .The
    paybackperiodis3.5y ear
    s.
    Answer(B)isincorrectbecause4y earsincl
    udestheaddit
    ional$50,
    000ofYear4.Answer(C)isincorr
    ectbecause4.2y
    earstakestheaverageinfl
    owofal l8year
    sand
    di
    videsthatint
    ot he$500,000initi
    ali
    nvestment.Answer(D)isincorr
    ectbecause5yearsusesonlythecashfl
    owsf r
    om ther
    emaining5y ears.

    l
    i
    i.Answer(A)iscorrect.Thepaybackr
    eciprocalforaninvestmenti sf
    oundbydivi
    ding1bythepaybacktime.Thepaybackti
    mef orthi
    sinv
    estmenti
    s3.5years,andthe
    paybackreci
    procalis1divi
    dedby3.5,or29%.
    Answer(B)isincorr
    ectbecause25%includestheaddi t
    ional$50,000ofYear4int
    hepaybackti
    me.Answer( C)isi
    ncorr
    ectbecause24%takestheaver
    ageinfl
    owofall
    8y ear
    sanddiv i
    desthatint
    othe$500,000i ni
    ti
    alinv
    estmenti nthepaybackti
    me.Answer(D)isi
    ncorrectbecause20%usesonlythecashflowsfr
    om theremaini
    ng5
    yearsint
    hepay backtime.

    l
    i
    ii
    .Answer(C)iscorrect.Thepaybackperiodforaninvestment,ignori
    ngthetimevalueofmoney ,canbef oundbyaccumulati
    ngeachyear
    'snetcashfl
    owsunt i
    lthe
    ini
    ti
    ali
    nvest
    mentisr ecover
    ed.Theref
    ore,di
    vi
    dingthe$500,000init
    iali
    nvest
    mentbyt heannual$130,000infl
    owgivesapaybackti
    meof3.85year
    s.
    Answer(A)isi
    ncorrectbecause3.85yearsi
    st hel
    engthoft hepaybackperi
    od.Answer(B)isincorrectbecause3.
    85year
    sisthelengt
    hofthepaybackper
    iod.Answer
    (D)isi
    ncorr
    ectbecause4y earsdoesnotproratet
    hefinal$130,
    000.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page107of107
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    l
    i
    v.REQUI RED:Thebail
    outperi
    odf orani nvestmentinanewmachi ne.
    DISCUSSION:(C)Thebai l
    outper iodisthet i
    mer equi
    redforthesum ofthecumul ati
    venetcashi nfl
    owandt hesalvagevaluetoequalt
    heor i
    ginali
    nvest
    ment.During
    years1,and2,costmi nussalvagev al
    uei s$70,000,andtheannualnetcashi nflow i
    s$36, 000.Hence,t heincr
    ement alamounttober ecoveredduri
    ngyear2i s
    $34,000($70,
    000–$36,000).Inter pol
    atinginyear2theref
    oreyiel
    dsabai l
    outperi
    odof1.9y ears[1+( $34,
    000÷$38, 000)
    ].
    Answer( A)i
    sincor
    rectbecauset heannualcashf l
    owsar e$36,000,not$50,
    000.Answer( B)i sincorr
    ectbecausecostmi nussalv
    agev al
    ueiny ear2is$70,
    000,not
    $80,000.Answer(D)isi
    ncorrectbecauset hei
    ncrementalamountt oberecover
    eddur i
    ngyear2i s$34,000not$14,000.
    l
    v
    . ThePVoftheout
    fl
    owsi
    s-$700mi
    l
    li
    on.Tof
    indt
    hedi
    scount
    edpay
    backy
    ouneedt
    okeepaddi
    ngcashf
    lowsunt
    ilt
    hecumul
    ati
    vePVsoft
    hecashi
    nfl
    owsequalt
    hePV
    oft
    heout
    fl
    ow:

    Year CashFl
    ow Di
    scount
    edCashFl
    ow Cumul ati
    ve
    PV
    0 -
    $700mil
    li
    on -$700.0000 -
    $700. 0000
    1 200mill
    i
    on 181.8182 -518.1818
    2 370mill
    i
    on 305.7851 -212.3967
    3 225mill
    i
    on 169.0458 -43.3509
    4 700mill
    i
    on 478.1094 434.7585
    Thepaybackoccurssomewher
    einYear4.Tof i
    ndoutexact
    lywher ewecal
    cul
    ate$43.
    3509/
    $478.
    1094=0.
    0907t
    hrought
    hey
    ear
    .Ther
    efor
    e,t
    hedi
    scount
    edpay
    back
    i
    s3.091years.
    l
    vi
    .
    Di
    scount ed
    Year CashFlow CashFl ow Cumul at
    ivePV
    0 -$3,000 -
    3,000.00 -
    3,000.00
    1 1,000 909.09 -
    2,090.91
    2 1,000 826.45 -
    1,264.46
    3 1,000 751.31 -
    513.15
    4 1,000 683.01 169.86

    AfterYear3,youcanseethaty
    ouwon’tneedal
    lofYear4cashf
    lowst
    obr
    eakev
    en.Tof
    indt
    hepor
    ti
    ont
    haty
    ouneed,
    cal
    cul
    ate$513.
    15/$683.
    01=0.
    75.Ther
    efor
    e,
    thediscount
    edpaybacki
    s3.75year
    s.
    l
    vi
    i
    .

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page108of108
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Di
    scountedCF Cumul at
    iveCF
    0 -200,000.00 -
    200,000.00
    1 45,454.55 -154,545.45
    2 82,644.63 - 71,
    900.82
    Pay back
    3 112,697.22 +40,796.40
    4 27,320.54 +68, 116.94
    5 15,523.03 +83, 639.97

    Pay
    backper
    iod=2y
    ear
    s+ =2.
    638y
    ear
    s.

    l
    vi
    ii
    .
    Year CashFl
    ow Di
    scountedCash CumulativeCash
    Fl
    ow Flow
    0 -
    $100,
    000 -$100,
    000.
    00 -$100,000.00
    1 40,
    000 36,
    363.
    64 -63,636.36
    2 90,
    000 74,
    380.
    17 10,
    743.81
    3 30,
    000 22,
    539.
    44 33,
    283.25
    4 60,
    000 40,
    980.
    81 74,
    264.06
    Di
    scount
    edPay
    back=1+ =1.
    86y
    ear
    s.

    l
    i
    x
    .Thesum ofthePVsofthet=1, t=2,andt=3cashf lowsatt=0f orProj
    ectAis$99,474.
    08.Thus,t
    hediscountedpay backperi
    odofProjectAexceeds3y earsand
    Proj
    ectAisnotaccept
    able.ThePVsoft het=1, t=2,andt=3cashf l
    owsatt=0f orProjectBar
    e$45,
    454. 55,$16,
    528.93,and$22,
    539.44,respect
    ivel
    y.ThesePVs
    sum t
    o$84,522.
    92,whichisgr
    eatert
    hant hecostoftheproj
    ect
    ,indi
    cat
    ingthatt
    hediscountedpay
    backperiodislessthan3y ear
    s.Thus,ProjectBwillbeundert
    aken.
    l
    x
    . X=$300,
    000xPVAnn4(
    12%)=$300,
    000x3.
    037
    X=$911,
    100
    l
    xi
    .3.
    037xACI-$800,
    000=$0
    CMAEXAMI
    NATIONQUESTIONS Page109of109
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    =$263,
    418

    l
    xi
    i.
    REUIRED:Todet er
    minet hepresentvalueofthef uturecashsav i
    ngsresul
    ti
    ngfrom pur chaseofthenewmachi ne.
    Answer( C)iscor r
    ect.Thepr esentv al
    ueoft he$30, 000savingsperyearfort
    hefirst2y earsiscalcul
    atedusingt
    hepr
    esentval
    ueofanannui
    tyf
    or2per
    iods.Si
    nce
    theamountoft hecashsav i
    ngsdr opsto$20,000i nyear3, t
    hisamountmustbecalcul atedseparat
    ely.ThePVofanannuityf
    or2peri
    ods,
    equal
    sthePVofanamount
    tobereceiv
    ed3y earsinthefuture.Thet ot
    alpr esentval
    ueoft hecashsavi
    ngsiscal culatedasfol
    lows:
    PVof$30, 000f or2periods=$30, 000x1. 65 $49, 500
    =
    PVof$20, 000inper i
    od3 =$20, 000x( 2.32 13, 400
    –1.65)=
    Totalpesentvalueofcashsav i
    ngs $62, 900
    Alt
    ernat
    ivel
    y,$20,000coul dhavebeent reat
    edasanannui t
    yfor3y ear
    sandanadditional $10,000f
    or2y ears.

    l
    xi
    ii
    . REQUI RED:Thepr esentv alueoft hecashf lowgener at
    edbyt heproject.
    DISCUSSI ON:( B)I fthecashi nf l
    ow, netoftaxes,attheendofeachof7y earsi s$5,000,andi fthediscountrateis12%, thepresentvalueofthi
    sseri
    esofcashf l
    ows
    willeequaltot hepr esentv alueofanor dinaryannuit
    yof$5, 000for7y earsat12%.Thei nt
    erestf act
    orfort hepresentvalueofanor di
    naryannuit
    yisequalt
    ot hesum
    oft heint
    erestfactor sfort hepr esentv alueof$1f orthesameper i
    od.Thei nterestfactorforanor dinaryannuityof$5,000forsev enperiodsis4.
    564.Thepr esent
    valueis$22,820( $5,000x4. 564) .
    Theal t
    ernati
    vei stocal culatet hepr esentvalueofeach$5, 000cashf low usingt heinter
    estf actorforthepr esentvalueof$1at12%f oreachoftheperiodsone
    thoughsev en.Thesum oft hesepr oductsisequal t
    ot hepresentval
    ueofanor dinaryannuit
    yof$5, 000f orsevenperiodsat12%.
    $5,
    000x0. 893=$4, 465
    5,
    000x0. 797= 3, 985
    5,
    000x0. 712= 3, 560
    5,
    000x0. 636= 3, 180
    5,
    000x0. 567= 2, 835
    5,
    000x0. 507= 2, 535
    5,
    000x0. 452= 2, 260
    5,
    000x4. 565=$22, 820
    Answer s(A),(
    C) ,and( D)ar eincor rectbecauset hepresentvalueofthecashf lowi sequal t
    ot heannual i
    nf l
    owt i
    mest hesum oft hepresentval
    uefact
    ors.

    l
    xi
    v
    . NPV,payback,
    andmi ssi
    ngcashf
    low Answer
    :bDif
    f:M
    Fi
    rst
    ,fi
    ndthemi ssi
    ngt=0cashfl
    ow.Ifpay
    back=2.5y
    ear
    s,thi
    simpl
    i
    est
    =0cashf
    lowmustbe-
    $2,
    000-$3,
    000+(
    0.5)
    $3,
    000=-
    $6,
    500.

    NPV=-
    $6,
    500+ + + +

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page110of110
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    =$765.
    91.

    l
    xv
    . NPV Answer
    :dDi
    ff
    :M

    Tabul
    arsol
    ution:
    NPV=$30,000( PVIFA10%,
    4)+$35,000(PVI
    FA10%,
    5)(
    PVI
    F10%,
    4)
    +$40,
    000(PVIF10%,
    10)-$150,
    0 00
    =$30,
    000(3.1699)+$35, 000(3.7908)
    (0.
    6830)
    +$40,
    000(0.3855)-$150,000=$51, 136.07 $51,
    136.

    Fi
    nancialcal
    cul
    atorsol
    uti
    on(i
    nthousands)
    :
    I
    nputs:CF0=-150;CF1=30;Nj=4;CF2=35;Nj=5;CF3=40;
    I=10.
    Output
    : NPV=$51.13824=$51,138.
    24 $51,138.
    l
    xvi
    . NPV Answer
    :bDi
    ff
    :M

    Tabul
    arsolution:
    PV=$5,000( PVIFA14%,5)+$3,000(PVI
    FA14%,
    3)(
    PVIF14%,
    5)
    +$2,000(PVI FA14%,
    2)(
    PVIF14%,
    8)
    =$5,000(3.4331)+$3, 000(
    2.3216)(
    0.5194)+$2, 000(1.
    6467)
    (0.
    3506)
    =$17,165.50+$3, 617.52+$1, 154.
    67=$21, 937.69.

    Fi
    nancialcal
    cul
    atorsoluti
    on(i
    nthousands)
    :
    I
    nputs:CF0=0;CF1=5; Nj=5;
    CF2=3; Nj=3;CF3=2;
    Nj=2;
    I=14.
    Output
    :NPV=21. 93726=$21,937.26.

    Not
    e:Tabul
    arsol
    uti
    ondi
    ff
    ersf
    rom cal
    cul
    atorsol
    uti
    onduet
    oint
    erestf
    act
    orr
    oundi
    ng.
    l
    xvi
    i
    .(
    $10,
    000x0.
    847)+(
    $12,
    000x0.
    718)+(
    $15,
    000x0.
    609)+(
    $20,
    000x0.
    516)+(
    $10,
    000x0.
    437)-$30,
    000=$10,
    911
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page111of111
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    l
    xvi
    i
    i
    .
    Invest
    ment ($50,
    000)
    Presentvalueofcashinflows:
    Year1( $20,000x0.943) 18, 860
    Year2( $24,000x0.890) 21, 360
    Year3( $38,000x0.840) 31, 920
    Year4( $28,000x0.792) 22, 176
    Netpresentv al
    ue$44, 316
    l
    xi
    x
    .
    Year0= ($50,
    000-$950,
    000)= $(900,000)
    Year1= $350,
    000x0.877= 306,950
    Year2= $350,
    000x0.769= 269,150
    Year3= $350,
    000x0.675= 236,250
    Year4= $350,
    000x0.592= 207,200
    $119, 550
    l
    xx
    .
    Yr
    .0($60,000-$200,
    000-$60,
    000)x1.
    000= $(
    200,000)
    Yr
    .1$50,000x0.909= 45,450
    Yr
    .2$150,000x0.826= 123,900
    Yr
    .3$150,000x0.751= 112,650
    $ 82,000
    l
    xxi
    .
    Yr
    .0($60,
    000-$200,000-$60,
    000)x1.
    000= $(
    200,000)
    Yr
    .1$50,000x0.806= 40,300
    Yr
    .2$150,000x0.650= 97,500
    Yr
    .3$150,000x0.524= 78,600
    $16, 400
    l
    xxi
    i
    .
    -$32,
    000-$160,
    000+$16,
    000= $(
    176,000)
    Yr1=$72,000x0.833= 59,976
    Yr2=$72,000x0.694= 49,968
    Yr3=$72,000x0.579= 41,688
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page112of112
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Yr4=$72,
    000x0.
    482= 34,
    704
    $ 10,
    336

    l
    xxi
    i
    i. Answer( C)iscorrect
    .Theproblem requiresf
    indingthepresentv
    alueof$500, 000ay earforeachof5years,
    usingthediscountr
    ateof14percent.Thecashoutlay
    isthendeduct edf r
    om thepresentval
    ueoft hatstream ofcashtoarri
    v eattheNPV.NPV=- 1,
    500,000+(t
    =1to5)$500,000/(1.
    14)t=-$1,
    500,
    000+( $500,000x3.433)
    =-$1,500,000+$1, 716,500=$216,500.
    Answer( A)i sincorr
    ectbecause($43,150)woul dbet heresul
    tofusing2. 9137ast heannuityfactor
    ,whi
    chisactual
    l
    yt hefact
    orfor14%at4per i
    ods( not5).Answer
    (B)isincorrectbecause$108,250ishalfoft hecorrectNPV.Answer( D)isincor
    rectbecauset hi
    sNPVwoul dbetheresultofusi
    ng3.8887astheannuityfactor
    ,which
    isactuall
    ythef actorfor14%at6per i
    ods( not5).
    l
    xxi
    v
    .
    ($70,
    000x4.
    111)-$240,
    000=$47,
    770

    l
    xxv
    . Answer(C)iscorrect.Annualcashout f
    lowf ort
    axesi s$12,
    000{ [$70,000i
    nfl
    ows-$20, 000cashoper ati
    ngexpenses-($100,000÷5)depreci
    ation]x40%}.
    Theannualnetcashi nf
    lowistherefore$38,000($70,000-$20, 000-$12,000).Thepresentvalueofthesenetinfl
    owsf ora5-yearperi
    odis$136,990(
    $38,000x3. 605
    presentval
    ueofanor di
    naryannuityfor5yearsat12%) ,andt heNPVoft heinvestmentis$36,990($136,990-$100,000invest
    ment )
    .
    Answer( A)isi
    ncorrectbecause$28, 840isthepr esentvalueoft hedepreciat
    iontaxsavings.Answer( B)i
    si ncorr
    ectbecause$8,150ignoresthedepr
    eci at
    iontax
    savings.Answer(D)isincor
    rectbecause$80, 250ignorestaxes.

    l
    xxv
    i. Answer( B)i scorrect
    .Thefoll
    owingtabl
    ederi
    vesthecashf l
    owsandNPV.
    Item Year0 Year s1t o5
    Inv estment -
    80,000,
    000
    Rev enue 144,000,
    000
    Var iablecost
    84,000,
    000
    Fixedcost 25,000,
    000
    Depr eci
    ati
    on 16,000,
    000
    Pr e-taxprofit 19,000,
    000
    Tax@ 36% 6,840,
    000
    Netpr ofi
    t 12,160,
    000
    Netcashf low 28,160,
    000
    Pr esentv al ue @ 12% ( 28,
    160,000 x 101,511,
    160
    3.6048)
    NPV= 21,
    511,160.
    Answer( A)isincorr
    ectbecause$17, 225,
    000resul
    tsfrom f
    aili
    ngtodeductdepr
    eciat
    ionincalcul
    ati
    ngtaxes.Answer(
    C)i
    sincorr
    ectbecause$26,
    780,000resul
    ts
    from failingtoconsi derthatdepr
    eci
    at i
    onisanoncashexpense.Answer( D)i
    sincorr
    ectbecause$56,117,
    000i
    sbasedonannualsal
    esof15,000uni
    ts,rat
    herthan
    12,000uni t
    s.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page113of113
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    l
    xxv
    ii
    .
    Cashf
    low=($15,
    000x0.6)+(
    $30,
    000/5x0.
    4)=$11,
    400
    NPV=$11,
    400x3.127-$30,
    000=$5,648

    l
    xxv
    iii
    .Answer( B)iscor rect.Thefir
    stst epi stocalculatet
    heannualcashf lowsf r
    om thepr
    ojectf
    orthebasecase( t
    heexpectedval
    ues).Thesemaybecal culat
    edas
    shown:
    DESCRI PTION HOW CALCULATED VALUE( $in
    mi
    ll
    ions)
    1.Rev enues 90,000x0. 30x$800 21.600
    2.Variabl ecost 90,000x0. 30x$400 10.800
    3.Fixedcost $4,000,000 4.000
    4.Depr eciation $20,000,000÷8 2.500
    5.Pretaxpr ofitItem 1-( I
    tems2+3+4) 4.300
    6.TaxI t
    em 5x0. 35 1.505
    7.Netpr of i
    t It
    em 5-I tem 6 2.795
    8.Netcashf low It
    em 7+I tem 4 5.295
    Thisl evelofcashf lowoccur sforeachoft he8y earsoftheproject.Thepresentv
    alueofan8-year,$1annuit
    yis4.639at14%.TheNPVoft heproj
    ecti
    st her
    efor
    e
    givenby :
    NPV=$5, 295,000x4. 639-$20, 000,000=$4, 563,505
    Answer( A)i si ncor rectbecause$2, 626, 415usedt hewrongdi scountfact
    or.Answer(C)i si
    ncorrectbecausei
    tf ai
    l
    edtoconsiderdepreciat
    ion.Answer( D)i
    s
    incorrectbecausei tfail
    edt oconsiderdepr eci
    ati
    onandot herfi
    xedcost s.

    l
    xxi
    x. Answer(D)i
    scor rect
    .The$100i ncr
    easeisdeducti
    blef
    ort
    axpurposes.Ther
    efor
    e,thenetef
    fecti
    s$65aftertax.Ata12%discountrat
    e,t
    hepresentval
    ueof$65
    is$58.
    04.Thus,t
    henetpr esentv
    aluewilldecl
    ineby$58.
    04.
    Answer(A)i
    sincorrectbecauseiti
    gnoresincometaxesandpr
    esentval
    ues.Answer(B)isi
    ncorr
    ectbecausei
    tignoresthet
    axshiel
    d.Answer(C)i
    sincorr
    ectbecause
    iti
    gnor
    espresentvalues.

    l
    xxx. DISCUSSION:Thenetpr esentv al
    ueofapr oj
    ectequal
    s:
    NPV=( PVoffutur
    ecashf l
    ows)–( I
    nvest
    ments)
    Si
    ncet hi
    sproblem i
    nvolvesal easer equi
    ri
    ngonlyannualpay
    ment
    sther
    eisnoi
    nit
    iali
    nvest
    menti
    nthi
    scase:Leaseamor
    ti
    zat
    ionmustbesubt
    ract
    edfr
    om cash
    i
    nfl
    owst odeter
    mineincomet axexpense.
    $7,,
    500 Annual cashinflow
    –5,000 Tax basis l
    ease
    amorti
    zati
    on
    $2,
    500 Taxableleasei ncome
    x40%
    $1,
    000 Taxexpensepery ear
    CMAEXAMI NATIONQUESTI ONS Page114of114
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    However
    ,leaseamorti
    zati
    oni snotacashout
    fl
    owandi
    tthusexcl
    udedf
    rom t
    hecal
    cul
    ati
    onofNPV.Theaf
    ter
    -t
    axpr
    esentv
    alueoft
    hel
    easeequal
    s:
    $7,
    ,500 Annualcashi nfl
    ow
    –1,000 Cashout fl
    owf ortaxes
    $6,500
    x1. 74 PVf actorfor2y earsat
    10%
    $11,310
    l
    xxx
    i
    .
    REQUIRED:Thei nterestrateimplicitinalease.
    DISCUSSION:( D)Pr esentv aluetablesmaybeusedt odet erminetheinter
    estrateifthepr esentval
    ueisalr
    eadyknown.Thepr esentvalueisdividedbytheper
    iodi
    c
    amountt ofindt hei nterestfactor
    .Thei nter
    estfact
    ormayt henbef oundinthepr esent-val
    ue-of-
    an-
    ordi
    nary-
    annui
    tytabl
    eintherowcor respondingtothenumberof
    peri
    odsov erwhi cht heannui tyispay abl
    e.
    Inthi
    squest ion,t heser i
    esofpay ment sisanannui t
    ydue,andanadj ustmentmustbemadebef oreusingtheordinar
    yannuitytable.Thef i
    rstpaymentisdue
    immediately
    , soitspr esentv alue(faceamount )of$4,
    000i sdeductedf r
    om thegivenpr esentvalueoftheannui
    ty.Therowforn–1per iods( 4)shouldt
    henbeused.
    Presentv al
    ue $15,192
    Minusf i
    rstpay ment (
    4,000)
    $11,192
    Di
    v i
    dedbyannui tyamount 4,000
    Presentv al
    uef actor 2,798
    Thepresentv aluef actorof2. 798isf oundunder16%i nther owforfourperi
    ods.
    Answers( A),(B),and( C)ar eincorrectbecausethepresentv al
    uefactorusedfall
    sunder16%.

    l
    xxxii
    .Answer( B)i
    scorrect
    .Ata10%hur dlerat
    e,t
    hepr esentval
    ueofthef utur
    einf
    lowsis:20,
    000x2.48685=$49,737
    Thus,thenetpresentval
    ueis$4,737(49,
    737-45,000).Theprofi
    tabi
    l
    ityindexcal
    culat
    ioni
    s:
    49,737
    45,000 =1. 1053
    Answer( A)isincorr
    ectbecauseitusesthewr ongpr esentv
    aluefactors.Answer( C)i
    sincor
    rectbecausei
    tusesthewr
    ongpr
    esentv
    aluef
    act
    ors.Answer(
    D)i
    s
    i
    ncorrectbecauseitusesthewrongpresentval
    uefactors.
    l
    xxx
    ii
    i
    . $100,
    000x4.
    868(
    PVAF,
    n=7,
    10%)=$486,
    800
    l
    xxx
    iv
    . $40,
    000x6.
    710(
    PVAF,
    n=10,
    8%)=$268,
    400
    l
    xxx
    v
    . $120,
    000X4.
    968(
    PVAF,
    n=8,
    12%)=$596,
    160
    l
    xxx
    vi
    . 4.
    355x$2,
    000=$8,
    710

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page115of115
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    l
    xxxvii
    .Answer(B)iscorrect.I
    fthe8%r et
    urnexact
    lyequalst
    hepresentv alueoft hefuturefl
    ows(i.
    e.,theNPViszero),thensimplydeterminet
    hepresentv
    alueofthe
    fut
    ureinf
    lows.Thus,($2,
    500)(PVI
    FAat8%f or10peri
    ods)+($5,
    000)(PVIFat8%f or10per i
    ods=($2,500)
    (6.
    710)+($5,000)(
    .463)=$19,090.
    Answer(A)isincorr
    ectbecause$16,775fail
    edtoincl
    udethepresentv alueofthe$5, 000ter
    minalbenefi
    t.Answer(C)i si
    ncorrectbecauset
    heydonotusepresent
    val
    ueanalysi
    s.Answer( D)i
    sincorr
    ectbecauset
    heydonotusepr esentv alueanal
    ysis.

    l
    xxxvii
    i
    .(b)Themaxi mum amountt hatKer
    nCo.shoul
    dinvestnow t
    oobt ai
    na15%i
    nter
    nalr
    ateofr
    etur
    nist
    hepr
    esentv
    alueoft
    hepr
    oject
    ’st
    otalnetcashf
    lowsas
    comput erbel
    ow.
    Yea Netcash x PVofanor di
    nar
    y = PVofnetcash
    r fl
    ows annui
    ty fl
    ows
    1 $50,000 x 0.
    870 = $43,500
    2 $80,000 x 0.
    756 = $60,480
    Total
    pr esentv
    alue $103,980

    l
    xxx
    ix
    . (
    $100,
    000x.
    833)+(
    $200,
    000x.
    694)=$222,
    100

    xc.
    CashFl
    owBeforeTax P17,
    863
    Depr
    eci
    ati
    on(P43,
    825 4) 10,
    706
    NetI
    ncomeBeforeTax 7,
    157
    I
    ncomeTax(40%) 2,
    863
    NetI
    ncome 4,
    294
    Depr
    eci
    ati
    on 10,
    706
    CashFl
    owAfterTax(P42,
    825 2.
    85498 P15,
    000

    xci
    . Bef
    ore-
    taxcashf
    lowsAnswer
    :bDi
    ff
    :M

    Tabul
    arsoluti
    on:
    X=after
    -taxcashfl
    ow.
    Y=before-t
    axcashflow.
    X=Y(1-T) .

    $10,
    000=X(
    PVI
    FA15%,
    10)

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page116of116
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $10,
    000=X(5.0188)
    X=$1,
    992.51.
    $1,
    992.51=Y(1-0.40)
    Y=$3,
    320.85 $3,321.

    Fi
    nancialcal
    culatorsol
    ution:
    I
    nputs:N=10; I=15;PV=- 10,000;FV=0.Out put:PMT=$1, 992.52.
    Befor
    e-taxCF=$1, 992.52/0.6=$3,320.87 $3,321.
    xci
    i
    . REQUI RED:Todet ermi
    net heannualsav i
    ngsneededf oraninvestmenttoreali
    zea12%y i
    eld.
    DISCUSSI ON:Answer( C)i
    scor rect
    .Thei nternalr
    ateofretur
    nmet hodofcapitalbudget
    ingdeter
    minest
    herat
    eofretur
    natwhichthepresentval
    ueofthecashfl
    ows
    willexactl
    yequalt heinvestmentout l
    ay.I nthisproblem,thedesiredIRRisgivenandt hecashf l
    owsmustbedetermined.Thenecessaryannualsav
    ingscanbe
    comput edasf ol
    lows:
    TVMFxCash PV (I
    nvestment
    fl
    ows= t oday)
    3.
    60x= $50, 000 = ( .57 x
    $10,000)
    3.
    60x= $44, 300
    x= $12, 306
    Ift
    heannual sav
    ingsequals$12, 306,t
    hepr esentvalueofthecashinflowswil
    lexactl
    yequalt
    hecashoutf
    lows.

    xci
    i
    i. Answer(
    B)iscorrect
    .Thecor r
    ectansweri
    s16.33%.I
    nvestmentcost÷$10,000=4.0yearsInvestmentcost=$40,
    000Thepr esentvalueofa7-yearannui
    tyi
    s
    $40,
    000,
    whi
    chequatestoar at
    eofretur
    nofabout16.
    33%.
    Answer(
    A)i
    sincor
    rectbecausetheret
    urni
    s16.33%.Answer(C)i
    sincor
    rectbecauset
    heret
    urnis16.33%.Answer(D)i
    sincor
    rectbecausetheret
    urni
    s16.33%.

    xci
    v. Answer( A)iscorr
    ect.Thefactort
    ouseis2.5,whi
    chisf
    oundatal
    i
    ttl
    eunder10%ont
    he3-yearl
    ineofanannui
    tyt
    abl
    e.
    Answer(B)isincor
    rectbecausethefactorof2.5isf
    oundatar
    ound10%.Answer(C)i
    sincor
    rectbecauset
    hefact
    orof2.
    5isf
    oundatar
    ound10%.Answer(
    D)i
    s
    i
    ncorr
    ectbecausethefactorof2.5isfoundatar
    ound10%.

    xcv
    . Answer( D)iscorrect
    .
    $50,
    000=$7,791(PVati for10periods)
    $50,
    000÷$7,791=6. 418
    Usi
    ngaPVt abl
    e,6.418isPVat9%f or10periods.
    Answer(A)i
    sincorr
    ectbecauset herat
    eofr etur
    nis9%.Answer(
    B)i
    sincor
    rectbecauset
    her
    ateofr
    etur
    nis9%.Answer(
    C)i
    sincor
    rectbecauset
    her
    ateofr
    etur
    nis
    9%.

    xcv
    i. Answer(D)i
    scorrect.Thetot
    alcashfl
    owsar
    eonl
    y$70,000(5x$14,000)
    .Thus,
    whatevert
    hedi
    scountr
    ate,t
    heNPVwillbel
    essthan$20,000($70,
    000-$50,
    000).
    Ther
    etur
    ninthefi
    rstyearis$14,
    000,or28%oft
    hei
    nit
    iali
    nvest
    ment
    .Sincethesame$14,000fl
    owsi
    neachy ear
    ,theI
    RRi
    sgoingtobegreaterthan10%(act
    uall
    y,i
    tis
    CMAEXAMI NATIONQUESTI ONS Page117of117
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    al
    most14%).
    Answer(A)i
    sincor
    rectbecauseiti
    si mpossi
    blef
    ort heNPVt obegr
    eatert
    han$20,000,r
    egardl
    essofthediscountrat
    eused.Answer(B)isi
    ncorr
    ectbecausei
    tis
    i
    mpossibl
    efort
    heNPVt obegr eat
    erthan$20,
    000,regardl
    essoft
    hedi
    scountrat
    eused.Answer(C)i
    sincor
    rectbecausetheI
    RRisgreat
    er;al
    most14%.
    xcv
    ii
    .
    $13,
    500/
    $3,148=4.219
    PVAFof4.288,n=7,cor
    respondst
    o14%
    xcv
    ii
    i
    . $100,
    000/$27,
    739=3.605
    PVAFof3.
    605,n=5,cor
    respondst
    o12%

    xci
    x
    . I
    RR Answer
    :cDi
    ff
    :E

    Tabularsoluti
    on:
    Sol
    v efirstf
    ornumericalFVIFAandobt
    aincor
    respondi
    ngi
    nter
    estr
    atef
    rom t
    abl
    e
    FV=$3, 310=$100(FVIFAIRR,
    20)
    FVIFAIRR,
    20=33.1 33.066
    I
    RR 5%

    Fi
    nancialcal
    cul
    atorsolut
    ion:
    I
    nputs:CF0=0; CF1=-100;Nj=19; CF2=3,210.Output:
    IRR=5.
    0%.
    Al
    ter
    nat emethodannuitycalcul
    ati
    on
    I
    nputs:N=20; PMT=- 100; FV=3,310.Out put
    :I=5.0%
    c
    . $38,
    000/$11,607=3.27,whichisthepvf act
    orforn=5, i=16%
    ci
    .$339,013.20=$60,
    000F
    F=5. 65022
    Chartcri
    teri
    afor10year
    sis5.
    65022=12%
    ci
    i
    .$52,
    650=$25,
    000F
    F=2.106
    Char
    tcri
    ter
    iaf
    or3year
    sis2.
    106=20%

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page118of118
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ci
    i
    i
    .$921,250=$250,000F
    F=3. 685
    Chartcri
    ter
    iaforsixy
    ear
    sis3.
    685=16%

    ci
    v
    . I
    RR Answer :cDi ff
    :M
    Tabul
    arsol
    uti
    on:
    Pr ectA: Cal
    oj culat
    ePVIFandl ooki nt abl
    emat
    chi
    ngper
    iod=1wi
    tht
    hecal
    cul
    atedf
    act
    orv
    alue
    $10,000=$11,800( PVIFIRR,
    1)
    0.
    8475=( PVIFIRR,
    1)
    I
    RRA =18%.

    Pr
    ojectC: Cal cul
    atet
    hePVI FAandl ookint
    abl
    emat
    chi
    ngper
    iod=3wi
    tht
    hecal
    cul
    atedf
    act
    orv
    alue
    $12,
    000 =$5,696(PVI FAIRR,
    3)
    2.
    10674 =(PVIFAIRR,
    3)
    IRRC 20%.

    Fi
    nancial
    cal
    cul
    atorsolut
    ion:
    Pr
    ojectA: I nputs:N=1; PV=-10,
    000;
    FV=11,
    800.
    Output:
    I=18%=I RRA.

    Pr
    ojectC: I
    nputs:N=3;PV=-
    12,
    000;PMT=5,
    696.
    Output:
    I=19.
    99% 20%=IRRC.
    cv
    . I
    RR Answer
    :dDi
    ff
    :M

    Tabul
    arsol
    uti
    on:
    Sol
    vefornumeri
    calPVIFandPVIFAt henobt
    aincor
    respondi
    ngi
    nter
    estr
    atef
    rom t
    abl
    e
    Machi
    neA:$2,000=$3, 877(PVI
    FIRRA,
    4)
    0.
    51586=PVIFAIRRA,
    4
    I
    RRA 18%.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page119of119
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Machi
    neB:$2,000=$832( PVI
    FAIRRB,
    4)
    2.40385=PVI
    FAIRRB,
    4
    I
    RRB 24%.

    Fi
    nancialcalcul
    atorsol
    ution:
    MachineA:I nputs:CF0=- 2,
    000;
    CF1=0;
    Nj=3;
    CF2=3877.
    Output:I
    RR=17. 996% 18%.

    Machi
    neB:Input
    s:CF0=-2,
    000;
    CF1=832;
    Nj=4.
    Out
    put:
    IRR=24.01% 24%.
    cv
    i
    . I
    RR Answer
    :cDi
    ff
    :E

    Tabularsol ut
    ion:
    $200,000 =$44,503(
    PVI
    FAIRR,
    10)
    PVIFAIRR,
    10 =4.49408
    IRR 18%.

    Fi
    nancialcal
    cul
    atorsol
    uti
    on:
    I
    nputs:CF0=-200,000;
    CF1=44,
    503;
    Nj=10.Out
    put
    :IRR=18%.
    cv
    ii
    .4.
    10x$1, 220=$5,002 7%I RR
    cv
    ii
    i
    . Mul
    ti
    pleI
    RRs Answer
    :cDi
    ff
    :T

    Numer
    icalsol
    uti
    on:
    Thi
    spr
    oblem canbesol
    vednumer
    ical
    l
    ybutr
    equi
    resani
    ter
    ati
    vepr
    ocessoft
    ri
    alander
    rorusi
    ngt
    hepossi
    blesol
    uti
    onspr
    ovi
    dedi
    nthepr
    obl
    em.

    I
    nvest
    igat ef i
    rstcl
    aim:Tryk=IRR=13%andk=12. 5%
    2
    NPVk=13% =- 10,
    000+100,000/1.13-100,
    000/ (
    1.13)=180. 91.
    2
    NPVk=12.5% =-10,
    000+100,000/1.125-100,000/(
    1.125) =-123.
    46.
    Thefi
    rstcl aim appear
    stobecor rect
    .TheIRRoft heprojectappear
    stobebet
    ween12.
    5%and13.
    0%.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page120of120
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nvesti
    gatesecondclai
    m:Tryk=800%andk=780%
    2
    NPVk=800% =-
    10,
    000+100,
    000/9-100,
    000/
    (1+8)
    =-10,
    000+11, 111.
    11-1,
    234.
    57=-123.
    46.
    2
    NPVk=780% =-
    10,
    000+100,
    000/8.
    8-100,000/
    (1+7.
    8)
    =-
    10,000+11, 363.
    64-1,
    291.
    32=72.32.

    Thesecondcl
    aim al
    soappear
    stobecor
    rect
    .TheI
    RRoft
    hepr
    ojectf
    lowsal
    soappear
    stobeabov
    e780%butbel
    ow800%.

    Bel
    owi
    sat
    abl
    eofv
    ari
    ousdi
    scountr
    atesandt
    hecor
    respondi
    ngNPVs.

    Discountr
    ate( %) NPV
    12.0 ($433. 67)
    12.5 ( 123. 46)
    12.7 (1.02)I RR1 12.
    7%
    13.0 180. 91
    25.0 6,000. 00
    400.0 6,000. 00
    800.0 ( 123. 46)
    787.0 2.94 IRR2 787%
    780.0 72. 32

    Byr andoml ysel ecti


    ngv ari
    ouscost sofcapi talandcal culatingthepr oj
    ect’sNPVatt heser ates,wef indt hatt herear etwoI RRs,oneatabout787per centandt he
    otheratabout12. 7per cent,sincet heNPVsar eappr oximat elyequal t
    ozeroatt hesev aluesofk.Thus, ther ear emul ti
    pleIRRs.
    ci
    x.Answer( D)iscor rect.TheMI RRi st hei nterestrateatwhi chthepr esentv al
    ueoft hecashout flowsdi scount edatt hecostofcapi talequalsthepr esentv al
    ueoft he
    terminalvalue.Thet erminalv aluei st hef utur
    ev alueoft hecashi nf
    lowsassumi ngt heyar ereinvestedatt hecostofcapi tal
    .Thepr esentv alueoft heout flowsi s
    $10,000becausenof utureout flowsoccur .Thet erminalv al
    uei s$14,396[(1.
    166x$6, 000)+( 1.08x$5, 000)+( 1.00x$2, 000)].Accordingl
    y,thepr esentv alueof$1
    i
    nterestfactorf orther ateatwhi cht hepr esentvalueoft heout fl
    owsequal sthepresentv al ueoft heterminalv alueis. 695($10,000÷$14, 396) .Thi
    sf actoriscl osest
    tothatfor12%.
    Answer( A)i sincorrectbecauset heMI RRmustbegr eaterthan12%.Thepr esentv al
    ueof$1i nterestfact orf orthispr oj
    ectthatequat esthepr esentv aluesoft he
    costsandt het erminal valueisl owert hant hefactorfor12%.Thel owert hepresentvaluef actor,thehigherthei nterestrate.Answer( B)isincorrectbecauset heMI RR
    mustbegr eaterthan12%.Thepr esentv alueof$1i nterestfact orforthi
    spr oj
    ectthatequat esthepr esentv aluesoft hecostsandt het erminalv al
    ueisl owert hant he
    factorfor12%.Thel owert hepr esentv aluefactor,thehighert hei nt
    erestrate.Answer( C)i sincor r
    ectbecauset heMI RRmustbegr eat
    ert han12%.Thepr esentv alue
    of$1i nter
    estf actorf orthispr ojectt hatequat est hepr esentv aluesoft hecostsandt het erminalvalueisl owert hant hefactorfor12%.Thel owert hepr esentv alue
    factor,
    thehi gherthei nterestrate.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page121of121
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    cx
    . Modi
    fi
    edI
    RR Answer
    :dDi
    ff
    :M

    Tabul
    arsol
    uti
    on:
    TV=$73,306(
    FVI
    FA12%,
    8)=$73,
    306(
    12.
    300)=$901,
    663.
    80.
    $275,
    000 =

    0.
    30499 =
    8
    (
    1+MI
    RR) =(
    FVI
    FIRR,
    8)=3.
    27869.

    Looki
    ntabl
    e:Per
    iods=8,
    I=16%.MI
    RR=16%.

    Al
    ter
    natemethod
    278691/8=1+MI
    3. RR
    MIRR=16%.

    Fi
    nanci
    alcalcul
    atorsol
    uti
    on:
    TV I
    nputs:
    N=8; I=12;PMT=73,306.Out
    put:FV=-$901,641.31.
    MIRR I
    nputs:N=8; PV=-275,
    000;FV=901,
    641.31.Output:I=16.0%.

    Al
    ternatemethod
    I
    nputs:CF0=0;CF1=73,306;
    Nj=8;I=12.Output
    :NFV=$901,
    641.
    31.
    I
    nputs:CF0=-275,000;CF1=0;Nj=7;CF2=901,641.
    31.
    Output:I
    RR=16. 0%=MI RR.
    cxi
    . MIRRandCAPM Answer:
    dDi f
    f:M

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page122of122
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    St
    ep1:Cal
    culat
    et hehistori
    calbeta.
    Regressionmet hod:Financial
    cal
    cul
    ator
    : Di
    ff
    erentcal
    cul
    ator
    shavedi
    ff
    erentl
    i
    stent
    ryprocedur
    esandkeyst
    rokesequences.
    EnterY-li
    st:Inputs:It
    em( 1)=9INPUT;I
    tem(2)=15I NPUT;I
    tem(
    3)=36INPUT.
    EnterX-li
    st:Inputs:It
    em( 1)=6INPUT;I
    tem(2)=10I NPUT;I
    tem(
    3)=24INPUT;useli
    nearmodel.
    Output:m orsl ope=1. 50.
    Graphical/
    numer icalmethod:
    Sl
    ope=Ri se/Run=( 36-9) /
    (24-6)=27/18=1.5.Beta=1.5.

    St
    ep2:Cal
    cul
    atecostofequi
    tyusi
    ngCAPM andbet
    aandgiv
    eni
    nput
    s:
    ke=kRF+Beta(
    MRP)=7. 0%+1.
    5(6%)=16.0%.

    St
    ep3:Cal
    cul
    at eMI RR:
    Tabular/ numer icalsol
    ution:
    Calculatet erminalv al
    ue( TV) :
    TV=$1, 000( FVIFA16%,
    3)=$1, 000( 3.5056)=$3,
    505.
    60.
    UsePV( cost)andTVt osol v
    ef orMI RR:
    3
    $2,028=TV/ (1+MI RR)
    3
    $2,028=$3, 505.60/(1+MI RR)
    3
    (1+MI RR)=1. 7286
    1+MI RR=1. 20
    MI RR=20%.

    Fi
    nancialcal
    culat
    orsoluti
    on:
    Terminalval
    ue:usingcashf l
    ows
    I
    nputs:CF0=0;CF1=1000; Nj=3;
    I=16.Out
    put:NFV=$3,
    505.
    60.
    MIRR:usingTVM
    I
    nputs:N=3; PV=- 2,
    028;PMT=0; FV=3,505.60.
    Output:I=20.01=MI RR 20%.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page123of123
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    cxi
    i ROR=[(1x1.
    09)
    5x93%]
    /9%
    =1.
    54x93%/9%
    =15.
    91%=16%

    cxi
    i
    i
    . Cr
    ossov
    err
    ateandmi ssingcashfl
    ow Answer:eDi ff
    :MN
    St
    ep1: Det er
    minet heNPVofPr oj
    ectAatthecrossoverrat
    e:
    2 3
    NPVA=- $4+$2/ 1.09+$3/(
    1.09)+$5/(1.09)
    =-$4+$1. 83486+$2.52504+$3.86092
    =$4.22082mi ll
    i
    on.

    St
    ep2: Det
    erminet
    hePVofcashi nfl
    owsf orProj
    ectBatthecr
    ossov
    err
    ate:
    2 3
    NPVB=CF0+$1. 7/
    1.09+$3.2/(
    1.09)+$5. 8/
    (1.
    09)
    =CF0+$1.55963+$2.69338+$4. 47866
    =CF0+$8.73167mill
    i
    on.

    St
    ep3: Det
    ermi
    net hecashoutfl
    owatt=0forProjectB:
    Att
    hecrossoverrat
    e,NPVA=NPVB;NPVA-NPVB=0.
    NPVA=$4.22082mi l
    li
    on;NPVB=CF0+$8.73167mil
    l
    ion.

    $4.
    22082-CF0-$8.73167=0
    -CF0=$8. 73167-$4.
    22082
    CF0=-$4.51085mill
    i
    on.

    Fi
    nanci
    alcal
    culat
    orsoluti
    on:
    St
    ep1: Det erminetheNPVofProjectAatt hecr
    ossoverr
    ate:
    Usingaf i
    nanci
    alcal
    cul
    ator,
    enterthefol
    lowi
    nginputs:
    CF0=- 4,CF1=2,CF2=3,CF3=5, I=9,andthensol
    veforNPVA=$4.
    22082mi
    l
    li
    on.

    St
    ep2: Det
    ermi
    nethePVofcashinfl
    owsforProj
    ectBatthecr
    ossoverr
    ate:
    Usi
    ngafi
    nanci
    alcal
    cul
    ator,
    entert
    hefoll
    owingi
    nputs:
    CF0=0,
    CF1=1.7,CF2=3.2,CF3=5.
    8,I=9,andthensolv
    eforNPV=$8.
    73167mi
    l
    li
    on.

    (
    Remember
    ,thi
    sisn’
    ttheNPVBbecauseatt
    hecr
    ossov
    err
    ateNPVB=NPVA=$4.
    22082mi
    l
    li
    on.
    )

    St
    ep3:Det
    ermi
    nethecashoutf
    lowatt=0forPr
    ojectB:
    Att
    hecr
    ossoverrat
    e,NPVA=NPVB;
    NPVA-NPVB=0.
    CMAEXAMI
    NATI
    ONQUESTIONS Page124of124
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    NPVA=$4.22082mi l
    l
    ion;NPVB=CF0+$8.
    73167mi
    l
    li
    on.
    $4.
    22082-CF0-$8.73167=0
    -
    CF0=$8. 73167-$4.
    22082
    CF0=-$4.51085mill
    i
    on.

    cxi
    v. Answer( C)iscor rect.Thecostofcapi talatwhichthetwoproj
    ectswil
    lproducethesameNPVcanbef oundbycal cul
    ati
    ngt heIRRofthedi
    ffer
    enceincashflows
    betweenthetwopr ojects.ProposalAr equiresanadditi
    onali
    nvest
    mentof$53,000andgener atesextracashflowsof$15,000f or6y ear
    s.TheI
    RRf ort
    hissetofcash
    fl
    owsexceeds16%buti slessthan18%.Thi sfurthermeansthat
    ,foranycostofcapitalbelow thi
    sr ange,ProposalAwi l
    lhav eahigherNPV,and,foranycostof
    capit
    alabovethisrange, ProposalBwi l
    lhaveahi gherNPV.
    Answer( A)i
    si ncorr
    ectbecausePr oposalAwoul dbesuper i
    or.Answer(B)isincorr
    ectbecausePr oposalAwoul dbesuper ior.Answer(D)isincorr
    ectbecause
    ProposalBwoul dbesuper ior.ProposalAwoul dhav eanegat
    iveNPVwithregardtotheincr
    ement alcashflows.

    cxv
    . NPVpr
    ofi
    l
    es Answer
    :bDi
    ff
    :T

    Fi
    nancialcalculatorsolution:
    SolveforIRRA
    I
    nputs:CF0=- 50,000; CF1=15, 990;Nj=5.Out put:IRR=18.0%
    SolveforIRRB
    I
    nputs:CF0=- 50,000; CF1=0; Nj=4;CF2=100, 560.Out put:
    IRR=15. 0%
    Solveforcrossov errateusi ngt hediff
    er ent i
    alprojectCFs,CFA-B
    I
    nputs:CF0=0; CF1=15, 990; Nj=4; CF2=- 84,570.
    Output:I
    RR=11. 49%.Thecr ossoverrat eis11. 49%.
    Tabularsoluti
    on:
    Solvefornumer icalPVI FAandPVI Fandobt aincor respondi
    ngi nt
    erestr
    atesf
    rom t
    abl
    e.
    Proj
    ectA:50, 000 =15, 990(PVIFAIRRA,5)
    3.12695=PVI FAIRRA,5
    I
    RRA 18%
    Proj
    ectB:50, 000 =100, 560(PVIFIRRB,
    5)
    0.49722=PVI FIRRB,
    5

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page125of125
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    IRRB 15%
    Solvingforthecr ossoverrateof11. 49%r equi
    resi
    nter
    polati
    on,whichi
    snotcoveredint hetext.However
    ,byusingt r
    ialander r
    orandanNPVprofil
    edrawing,the
    studentcanselectt hecor r
    ectmul t
    iplechoiceanswer,11.
    5%.DrawinganNPVpr ofi
    ledrawingusingthecalcul
    atedIRRs,andt heNPVsatk=0%, showsthatthere
    i
    sacr ossoverrate.Oft heresponsesl ist
    edintheproblem,16.
    5%and20. 0%ar
    ecl earl
    yt oohigh,si
    ncetheIRRB i
    s15%.Atk=6. 5%theNPVsarenotequal,thus
    11.5%mustbet hecor rectresponse.
    cxv
    i. Answer( A)iscor r
    ect.TheNPVofbot hmachinesmustbecal cul
    atedandcompar edt odeterminewhichwillyi
    eldabet terretur
    nofcashfl
    ows.MachineAi s
    cal
    culatedasonel umpsum pay abl
    ein4y earsminust
    heiniti
    ali
    nvest
    mentcost.

    TheNPVofMachi
    neBi
    scal
    cul
    atedast
    hepr
    esentv
    alueofanor
    dinar
    yannui
    tyof$13,
    000f
    or4y
    ear
    s,mi
    nust
    hei
    nit
    ial
    inv
    est
    mentcost
    .

    Bycompar i
    ngtheNPVofbot hmachines,Cl
    i
    ffwoul
    dchooseMachi neAbecauseNPVA>NPVBby$1, 044.
    Answer(B)isincor
    rectbecauseMachineAisabetterchoi
    ce.Answer(
    C)isincor
    rectbecauset
    hedif
    fer
    encei
    s$1,
    044.Answer(
    D)i
    sincor
    rectbecauseMachi
    neA
    hasthehigherNPV.

    cxv
    ii. Answer( D)i
    scor rect
    .TheNPVoft heelect
    ri
    cbusis$27,
    801,whichisgreaterthanthatoftwogas-poweredbussesbought4y ear
    sapart.TheNPVforthe$90,000
    elect
    ri
    cbusi nvol
    vesmul tipl
    yi
    ngthe$28,000annualcashfl
    owstimest hepresentv al
    uef act
    orof4.2072,whichequal
    s$117,801.Deduct
    ingt he$90,
    000init
    ialcost
    resul
    tsinanNPVof$27, 801.TheNPVf ort
    hetwogas-poweredbussesis$8,205,calcul
    atedasfol
    lows:
    $22,000x4.2072 $92,
    558.40
    -Fi
    rstbus 55,
    000.00
    -Secondbus( 55,000x.5337) 29,
    353.50
    NPV $8,
    204.90
    Answer( A)i
    sincorrectbecausei
    tisbasedononlythefi
    rstf
    ouryearsfort
    hegas- poweredbus.Answer( B)i
    sincorr
    ectbecausei
    tdidnotdi
    scountthepurchaseoft he

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page126of126
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    secondgas-
    power
    edbus.Answer(
    C)i
    sincor
    rectbecausei
    tissi
    mpl
    yadoubl
    i
    ngoft
    heNPVf
    ort
    hef
    ir
    stf
    oury
    ear
    soft
    hegas-
    power
    edbus.

    cxv
    iii
    .Answer( B)iscor rect
    .Thef i
    rstthi
    ngt onotei sthatriskycashout flowsar ediscountedatalowerdi scountr
    ate, soint hiscasewedi scountt
    heriski
    erProjectB's
    cashflowsat11%-2%=9%.Pr oj
    ectA'scashf lowsar ediscountedat11%.Wewoul dfindthePVoft hecostsasfollows:
    Proj
    ectA Proj
    ectB
    CF0=- 10,
    000,000 CF0=- 5,
    000,000
    CF1-10=- 1,
    000,000 CF1-10 =- 2,
    000,000
    I=11.0% I=9.0%
    SolveforNPV=- $15,889,
    232 Sol veforNPV=- $17,835,315ProjectAhast helowerPVofcost s.ProjectBisev aluat
    edwi thal owercostofcapit
    al,9%,refl
    ecting
    great
    erriskoft hecashout f
    lowonl yproject.Thisissomewhatt ri
    cky ,
    becauseCMAcandi datestypi
    call
    ythinkaboutr ai
    singt hediscountrat
    ebecauseofrisk,butthat
    i
    swhenr evenuesornetcashi nfl
    owsar esubjecttorisk.Thedi scountrateislower edtorefl
    ectri
    skwhenonl ycostsar esubj ecttori
    sk.
    Answer( A)isincorrectbecause- $5.
    9mi ll
    ionresultsfrom fail
    ingt oconsidertheiniti
    al$10mi l
    li
    onoutlay.Answer( C)isi ncorrectbecause-$16.
    8milli
    onisbasedon
    thewrongdi scount.Answer( D)isincorr
    ectbecause- $17. 8milli
    oni st
    heNPVf orPr oj
    ectB, whi
    chisnotasgoodasPr oj
    ectA.

    cxi
    x. Answer( B)iscor rect.Thesi zeofMul v a'
    scapi talbudgetwi l
    lbedet erminedbyt henumberofpr ojectsitcanprofit
    abl yunder t
    ake, i.
    e.,thosepr ojectsforwhi cht he
    IRR>appl icableWACC.Fi rst,f
    indt hecost sofeacht ypeoff i
    nancing:costofr et
    ai nedear ni
    ngs=ks=( $2.50÷$40)+0. 05=11. 25%andcostofdebt=kd=10%.To
    cal culatethecostofnewequi ty,ke, wesol veforke=[ $2. 50÷( $40-$2) ]+0. 05=0. 1158=11. 58%.Gi vent hefir
    m'star getcapi t
    alst r
    uctur eandi tsretai
    nedear nings
    bal anceof$900, 000,t hef ir
    m canr ai se$1, 500,000wi t hdebtandr etainedearningsbef or
    ei tmustuseout si
    deequi t
    y .Ther ef
    ore,theWACCf or0-$1, 500, 000of
    financi ng=0. 4(0.10)(
    1-0. 4)+0. 6(0.1125)=0. 0915or9. 15%.Abov e$1,500,000,thef ir
    m musti ssuesomenewequi ty,sot heWACC=0. 4(0.10) (1-0. 4)+0. 6(0.1158)
    =0. 0935or9. 35%.Pr ojectsA, B, andCwi lldefini
    telybeunder t
    akenbecauset heIRR>WACC.Next ,determinewhet herPr oj
    ectDwi l
    lbepr ofitable.Sinceint akingA, B,
    andC,wewi llneedf i
    nanci ngof$1, 200, 000,the$550, 000neededf orPr oj
    ectDwoul dinvol
    vef i
    nancing$300, 000withdebtandr etainedear ningsand$250, 000wi th
    debtandnewequi ty
    .Thus,t heWACCf orPr ojectDi s( $300,000÷$550, 000)x0.0915+( $250,000÷$550, 000)x0.0935=9. 24%,whi chi sl esst hanPr ojectD' sIRR.
    Thus, ProjectsA, B,C,andDshoul dbeaccept ed, andt hef ir
    m'scapi t
    al budgetis$1, 750,000.
    Answer( A)i si ncorrectbecause$1, 200,000doesnoti ncludePr ojectD. Answer( C)i sincorr
    ectbecause$2, 400,000i ncludesPr oj
    ectE,whi chwoul dnotbea
    pr ofit
    ablei nvest mentsi nceitsI RRi sl esst hant hewei ghtedav eragecostofcapi tal .Answer( D)isincorrectbecause$800, 000excl udesPr ojectsCandD,whi char e
    bot hpr ofi
    tabl e.

    cxx. Answer( B)iscorrect.TheIRRi sthedi


    scountrat
    eatwhicht henetpresentvalue(discountednetcashinflows-investment)ofapr ojecti
    szer o.Hence,an
    i
    nvestmentshouldbepr ofit
    ableift
    heIRRexceedsthecompany
    'scostofcapital
    .Pr
    ojectsB,D, andE,withacombinedcostof$1,050,000,havethehighestI
    RRs.Each
    i
    si nexcessoft hecompany '
    smaximum 11%costofcapi t
    al(
    10%+. 5%+. 5%).Becauset heircombinedcostexceedsthel ev
    el($1,000,
    000)atwhi chthecostof
    capit
    alri
    sesto11%, Project
    sA( 10.
    5%)andC( 10.
    8%)mustberejectedusi
    ngtheIRRcr i
    ter
    ion.
    Answer( A)isincor
    rectbecauset heIRRsforB,D,andEexceedt hecostofcapi t
    al.Answer( C)i
    sincorr
    ectbecauseprojectCshoul dber ej
    ected.Answer(D)is
    i
    ncorrectbecauseproj
    ect sAandCshoul dberej
    ected.

    cxxi
    . Answer(
    A)iscorr
    ect
    .Ifthepr
    ojectsar
    emutual
    l
    yexcl
    usi
    ve,
    onl
    yonecanbeaccept
    ed.Thedeci
    sionrul
    eistoaccepttheproj
    ectwit
    hthehi ghestNPV(
    ProjectA)
    .
    Answer(
    B)i
    sincorr
    ectbecauseProjectBhasanegat
    iveNPVandwoul
    dnotbeaccepted.Answer(C)isincor
    rectbecause,bydefi
    nit
    ion,onlyonepr
    ojectcanbe

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page127of127
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    accept
    ed.Answer(
    D)i
    sincor
    rectbecause,
    bydef
    ini
    ti
    on,
    onl
    yonepr
    ojectcanbeaccept
    ed.
    cxxi
    i
    .
    E,becausei
    thast
    hehi
    ghestNPV.
    cxxi
    i
    i
    . Y,
    becausei
    thast
    hehi
    ghestNPV.
    cxxi
    v
    .

    Atacostofcapi
    tal
    of15%,
    bot
    hpr
    oject
    shav
    enegat
    iveNPVsand,
    thus,
    bot
    hwoul
    dber
    eject
    ed.

    Tabul
    arsol
    uti
    on(int
    housands):
    NPVX=-100+50(PVIF15%,
    1)+40(
    PVIF15%,
    2)+30(PVI
    F15%,
    3)+10(PVI
    F15%,
    4)
    =-100+50(0.
    8696)+40( 0.
    7561)+30( 0.
    6575)+10(0.5718)
    =-0.
    833=-$833.

    NPVZ=-100+10(PVIF15%,
    1)+30(
    PVIF15%,
    2)+40(PVI
    F15%,3)+60(PVI
    F15%,
    4)
    =-
    100+10( 0.
    8696)+30( 0.
    7561)+40( 0.
    6575)+60( 0.5718)
    =-
    8.013=-$8,
    013.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page128of128
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Fi
    nancial
    calculat
    orsol
    uti
    on(i
    nthousands)
    :
    Pr
    ojectX:Inputs:
    CF0=-100;
    CF1=50; CF2=40;
    CF3=30;
    CF4=10;I=15.
    Output:NPVX=-0.
    833=-$833.

    Pr
    ojectZ:I
    nputs:
    CF0=-100;
    CF1=10;CF2=30;
    CF3=40;
    CF4=60;I=15.
    Out
    put:NPVZ=-8.
    014=-$8,
    014.

    cxxv
    .

    Tabul
    arsol
    ution:
    NPVA=$15,625(PVI
    FA10%,
    5)-$50,
    000=$15,
    625(
    3.7908)-$50,
    000
    =$59,
    231.25-$50,
    000=$9, 231.
    25.

    NPVB=$99,500(
    PVIF10%,
    5)-$50,
    000=$99,
    500(
    0.6209)-$50,
    000
    =$61,
    779.55-$50,
    000=$11, 779.
    55.

    NPVB>NPVA;
    $11,
    779.
    55>$9,
    231.
    25;
    ChoosePr
    ojectB.

    Fi
    nancial
    calculat
    orsol
    uti
    on:
    Pr
    ojectA:Inputs:
    N=5; I=10;PMT=15,625.
    Output:PV=-59,
    231.04.
    NPVA=$59, 231.
    04-$50,000=$9,
    231.
    04.

    Pr
    ojectB:I
    nputs:
    N=5; I=10;FV=99,500.
    Out
    put:PV=-61,
    781.
    67.
    NPVB=$61,781.
    67-$50,000=$11,
    781.
    67.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page129of129
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Al
    ternat
    emet hodbycashflows
    Pr
    ojectA:Inputs:
    CF0=-50,000;CF1=15,
    625;
    Nj=5;
    I=10.
    Output:NPV=$9,231.04.

    ProjectB:Inputs:CF0=-50,000; CF1=0; Nj=4;CF2=99, 500;I=10.


    Output:NPV=$11, 781.67.
    cxxvi.Answer( C)i scor r
    ect.Onlyt wooft hepr oj
    ectscanbesel ectedbecauset hreewouldr equir emor ethan$450,000ofcapi t
    al.Pr
    ojectScanimmedi atel
    ybe
    dismi ssedbecausei thasanegat i
    venetpr esentv al
    ue(NPV) .Usingt heNPVandt heprofi
    tabili
    tyindexmet hods,thebestinvest
    mentsappeart
    obeQandR.The
    i
    nt ernalrateofreturn(IRR)met hodi ndi
    catesthatPi sprefer
    abletoR.Howev er,
    itassumesrei nvestmentoff undsduri
    ngy ear
    s4and5att heI
    RR(18.
    7%).Giventhat
    reinvestmentwi ll
    beatar at
    eofatmost12%, theIRRdecisioncri
    terionappearstobeunsoundi nthissit
    uation.
    Answer( A)isincorrectbecauset heamountofcapi t
    alavail
    abl
    el i
    mi t
    st hecompanyt otwopr ojects.Answer( B)i
    sincorr
    ectbecausetheamountofcapi
    talavail
    able
    l
    imi t
    st hecompanyt otwopr oj
    ect s.Answer( D)isincorr
    ectbecauset hepr of
    it
    abil
    it
    yindexandNPVar ehigherforRthanP.

    cxxvi
    i.Answer( B)iscor r
    ect.Becauseunusedfundscannotbei nvestedatar at
    egreaterthan12%,thecompanyshouldsel
    ectt
    heinvestmentwi ththehighestnetpr esent
    value.Proj
    ectQi sprefer
    abletoRbecausei tsret
    urnont heincremental$45,
    000inv est
    ed($235,
    000costofQ-$190,000costofR)isgreaterthan12%.
    Answer( A)isincorrectbecausePr oj
    ectPhasal i
    feofonly3y ears,andthehighIRRwoul dbeearnedonlyfort
    hatperi
    odandcouldnotber einvestedatt hatratein
    years4and5.Al so,P'sNPVi slowerthanthatofQ.Answer( C)isincor
    rectbecause,alt
    houghP'sIRRof18.7%for3year
    sexceedsQ's( 17.6%f or5y ears)
    , t
    hef unds
    fr
    om Pcannotbei nvest
    edi nyears4and5atgr eatert
    han12%.Answer( D)isincorr
    ectbecausethepaybackperi
    odisapoormeansofr ankingproj ect
    s.Itignores
    bothr ei
    nvest
    mentr atesandt heti
    mev alueofmoney .

    cxxv
    ii
    i
    . Mut
    ual
    l
    yexcl
    usi
    vepr
    oject
    s Answer
    :bDi
    ff
    :M

    Tabularsolut
    ion:
    Solv
    ef ornumer i
    calPVIFAandPVI F,thenobt ai
    ncor
    respondi
    ngi
    nter
    estr
    atef
    rom t
    abl
    e.
    Proj
    ectA:$100, 000 =39,500( PVI FAIRRA,
    3)
    2.53165 =PVIFAIRRA,
    3
    I
    RRA 9%

    Pr
    ojectB:$100,
    000 =133,000( PVI
    FIRRB,
    3)
    0.
    75188 =PVIFIRRB,
    3

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page130of130
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    RRB 10%
    Thef
    ir
    m’scostofcapi
    tal
    isnotgi
    veni
    nthepr
    obl
    em;
    useI
    RRdeci
    sionr
    ule.Si
    nceI
    RRB>I
    RRA;
    Proj
    ectBi
    spr
    efer
    red.

    Fi
    nancial
    calcul
    atorsol
    ution:
    Pr
    ojectA:Inputs:CF0=-100,
    000;CF1=39,
    500;
    Nj=3.
    Output:I
    RRA=8. 992% 9.0%.

    Pr
    ojectB:Inputs:
    CF0=-100,
    000;
    CF1=0;Nj=2;CF2=133,
    000.
    Output:I
    RRB=9.972% 10.0%.
    cxxi
    x
    . St
    ep1: Dr
    awt heti
    meli
    nes( i
    nmil
    li
    onsofdol
    l
    ars)
    :

    St
    ep2: Cal
    cul
    atet
    heNPVf oreachsystem:
    2 3 4 5 6 7 8 9 10
    NPVS=- $3+$2.5/
    1.12-$0.5/
    (1.
    12) +$2.
    5/(1.
    12)-$0.5/
    (1.
    12) +$2.
    5/(
    1.12)-$0.
    5/(
    1.12) +$2.
    5/(
    1.12)-$0.
    5/(
    1.12)+$2.
    5/(
    1.12)+$2.
    5/(
    1.12)
    NPVS=- $3+$2.232-$0.399+$1.779-$0.318+$1.419-$0.253+$1.
    131-$0.202+$0.902+$0.805
    NPVS=$4. 096$4.1mill
    ion.
    1 2 3 4 5 6 7 8 9 10
    NPVL= -$5+$2/(1.
    12) +$2/(
    1.12)+$2/(
    1.12)+$2/(
    1.12)-$2/
    (1.
    12) +$1.
    5/(
    1.12)+$1.5/(
    1.12) +$1.
    5/(
    1.12)+$1.
    5/(
    1.12)+$1.
    5/(
    1.12)
    NPVL= -$5+$1.786+$1.594+1.424+$1.
    271-$1.
    135+$0.760+$0.679+$0.
    606+$0. 541+$0.483
    NPVL= $3.009$3.01mil
    li
    on.

    cxxx. Answer(
    B)iscor rect.Theprof
    itabi
    l
    ityindexequalsthepresentvalueofthecashinf
    lowsdivi
    dedbythei
    nvestmentoutl
    ay.Thehighestprof
    itabil
    it
    yindexi
    sProject
    B'sat2.
    400($600,000÷$250, 000).
    Answer(A)i
    si ncorrectbecauset heprofitabi
    l
    ityi
    ndexf orAis. 89($980,000÷$1,100,000)
    .Answer(C)isincorr
    ectbecausetheprofi
    tabil
    i
    tyi ndexforCis1.307
    ($1,
    830,
    000÷$1,400, 000).Answer(D)isincorr
    ectbecausetheprofit
    abil
    it
    yindexforDis1.215($790,
    000÷$650,000).

    cxxxi
    .Answer(C)i
    scorrect
    .Proj
    ectChasthehi
    ghestnetpr
    esentv
    alue($1,
    830,000-$1,
    400,
    000=$430,000)
    ,soitshouldbechosen.
    Answer(
    A)isincor
    rectbecausePr
    ojectAhasanegat i
    venetpresentv
    alue.Answer(B)isi
    ncor
    rectbecauseProjectBhasanetpr
    esentv
    alueofonl
    y$350,000.
    CMAEXAMI NATIONQUESTIONS Page131of131
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer(
    D)i
    sincor
    rectbecausePr
    ojectDhasanetpr
    esentv
    alueofonl
    y$140,
    000.

    cxxxii
    .Answer( C)i
    scor r
    ect.Acompanyusi ngthenetpr esentvalue(NPV)met hodshouldundertakeallproj
    ect
    swithposi t
    iveNPVst hatarenotmut ual
    lyexclusive.
    GiventhatProj
    ects1,2,and4hav eposit
    iveNPVs, thosepr oj
    ectsshoul
    dbeunder taken.Fur
    ther
    mor e,acompanyusingt heinter
    nalr
    ateofretur
    n(IRR)asadeci si
    on
    ruleor
    dinari
    l
    ychoosespr oj
    ect
    swi t
    har et
    urngreaterthant hecostofcapi
    tal
    .Givena12%costofcapi t
    al,
    Proj
    ect
    s1, 2,and4shoul dbechosenusinganIRRcriteri
    oni f
    theyarenotmutuall
    yexclusi
    ve.Useoftheprofi
    tabil
    ityi
    ndexy i
    eldsasimil
    ardecisi
    onbecauseapr ojectwit
    hanindexgreaterthan100%shouldbeunder t
    aken.
    Answer( A)i
    sincorr
    ectbecauseProject3hasanegat i
    veNPV.Answer( B)isincor
    rectbecauseProject3hasanegat i
    veNPV.Answer( D)isincor
    rectbecausePr oject
    4hasaposi ti
    veNPVandshoul dbeunder t
    aken.

    cxxxi
    ii
    .Answer( D)iscorr
    ect.Wit
    honly$12,000,
    000av ai
    lable,andeachprojectcosti
    ng$4, 000,
    000ormore,nomorethant
    wopr oj
    ect
    scanbeundert
    aken.Accordi
    ngly
    ,
    Proj
    ectsshouldbeselectedbecausetheyhavethegreatestNPVsandpr ofi
    tabi
    li
    tyindexes.
    Answer( A)i
    sincorr
    ectbecauseProject3hasanegativeNPV.Answer( B)isincorr
    ectbecausechoosi
    ngt hr
    eepr
    oject
    svi
    olat
    esthe$12,
    000,
    000l
    i
    mitat
    ion.Answer(C)
    isi
    ncorrectbecausethecombinedNPVofPr oject
    s1and4i slessthant
    hecombi nedNPVofPr oj
    ect
    s1and2.

    cxxxi
    v .Answer(C)iscor rect.Wit
    honl y$6,000,
    000av ailable,andeachpr ojectcosti
    ng$4,000,
    000ormor e,nomoret hanonepr ojectcanbeunder taken.Pr oj
    ect1should
    bechosenbecausei thasaposi t
    iveNPVandt hehi ghestpr ofi
    tabi
    li
    tyindex.Thehighprofi
    tabil
    it
    yindexmeanst hatthecompanywi l
    lachievet hehighestNPVper
    dol l
    arofinv
    estmentwi thProject1.Thepr ofi
    tabil
    i
    t yindexf acil
    it
    atescompar i
    sonofdi f
    fer
    ent-
    sizedinvestments.Answer( D)isincorrectbecause,despi t
    ehavi
    ngt he
    highestNPV, Project2hasal owerpr ofi
    tabil
    it
    yindext hanPr oject1.Consequentl
    y,Proj
    ect1offersthegr eat
    err
    eturnperdollarofinvestment.
    Answer( A)isincor r
    ectbecausePr oj
    ect3hasanegat iveNPVandshoul dnotbeselect
    edregardlessofthecapitalavai
    l
    able.Answer( B)isincorrectbecauseselect
    ing
    twopr oj
    ectsviolatesthe$6,000,000limitat
    iononf unds.

    cxxxv.Answer(
    C)iscorrect.AcompanyusingtheNPVmet hodshoul
    dundertakeallproj
    ectswithapositi
    veNPV,unlesssomeofthoseproject
    sar
    emut ual
    l
    yexcl
    usi
    ve.
    Givent
    hatProj
    ects2,3,and4havepositi
    veNPVs, t
    heyshouldbeunder
    taken.Project1hasanegat i
    veNPV.
    Answer(A)i
    sincorr
    ectbecauseProj
    ect1hasanegat i
    veNPVandshoul dnotbeunder taken.Answer(B)i
    sincor
    rectbecausePr
    oject1hasanegat
    iveNPVandshoul
    d
    notbeunder
    taken.Answer(D)isi
    ncorrectbecausePr
    oject1hasanegativ
    eNPVandshoul dnotbeundert
    aken.

    cxxxvi
    .Answer(D)iscorr
    ect.Giv
    ent hatonl
    y$600,
    000isavail
    ableandthateachproj
    ectcosts$200,
    000ormore,nomor ethantwopr oj
    ect
    scanbeunder t
    aken.Because
    Proj
    ects3and4hav ethegreatestNPVs,pr
    ofi
    tabi
    l
    ityi
    ndexes,andIRRs,t
    heyaretheproj
    ectsi
    nwhichthecompanyshouldinvest.
    Answer(A)isincor
    rectbecausePr oj
    ect1hasanegati
    veNPV.Answer( B)i
    sincorr
    ectbecausethi
    sanswerviol
    atesthe$600,000li
    mitat
    ion.Answer(
    C)isincorr
    ect
    becausethecombinedNPVofPr oj
    ects2and3islesst
    hant hecombinedNPVofPr oj
    ects3and4.

    cxxxvi
    i.
    Answer(D)iscorrect.Gi
    venthat$300,000isav ai
    labl
    eandt hateachproj
    ectcosts$200,000ormore,onl
    yoneprojectcanbeundert
    aken.BecauseProj
    ect3hasa
    posit
    iveNPVandt hehighestprof
    it
    abili
    tyi
    ndex,iti
    st hebestinvest
    ment.Thehighprofi
    tabi
    li
    tyindexmeansthatt
    hecompanywi l
    lachi
    evethehighestNPVperdoll
    arof
    inv
    estmentwit
    hPr oject3.Theprofi
    tabi
    li
    tyindexfacil
    it
    atescompar i
    sonofdif
    ferent
    -si
    zedinvestment
    s.
    Answer(A)isincorrectbecauseProject1hasanegat i
    veNPV.Answer( B)isincor
    rectbecausechoosingmorethanonepr oj
    ectvi
    olatesthe$300,000l
    imit
    ati
    on.
    Answer(C)i
    sincorrectbecausechoosingmor ethanonepr ojectvi
    olat
    esthe$300,000li
    mitati
    on.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page132of132
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    cxxxvi
    ii
    . Answer( B)iscorr
    ect
    .TheNPVi stheexcessofthepresentval
    ueofest i
    matedcashinfl
    owsoverthenetcostoftheinvest
    ment .Atazer ocostofcapi t
    al,
    theNPVi ssimpl ythesum ofapr oj
    ect’
    sundiscountedcashfl
    ows.Thus, theNPVofPr oj
    ectAis$50,
    000($40,000+$40,000-$30,000),andt hePNVofPr ojectBis
    $200,000($700,000+$500, 000-$1,
    000,000).
    Answer( A)isincorrectbecause$30,000and$1, 000,
    000aretheinit
    iali
    nvestmentoutlaysforAandB,respecti
    vel
    y.Answer(C)i sincorrectbecause$80,000and
    $1,200,
    000ar ethecashi nf
    lowsforAandB,r espect
    ivel
    y.Answer(D)isi ncor
    rectbecause$110,
    000forProjectAand$2,200,000forPr ojectBarecalculatedby
    addingtheini
    ti
    al outlay
    stothesum ofthecashi nfl
    ows.

    cxxxi
    x.Answer(
    D)iscorr
    ect.Theint
    ernalrateofret
    urni
    nsthediscountrat
    ethatset
    saproj
    ect
    ’sNPVequalt
    ozer
    o.Thei
    nter
    nalr
    ateofr
    etur
    nmaybedet
    ermi
    nedas
    fol
    lowsi
    fIRRist
    heint
    ernal
    rat
    eofreturn,tist
    hetimeper
    iod,
    andni sthenumberofti
    meperi
    ods.

    Subst
    it
    uti
    ngi
    nthef
    oregoi
    ngexpr
    essi
    ony
    iel
    dsanannual
    int
    ernal
    rat
    eofr
    etur
    nof100%.

    cxl
    .Answer( A)iscorr ect.NPVassumest hatcashinfl
    owsf r
    om theinvestmentpr oj
    ectcanber einvestedatt hecostofcapital
    ,whereasIRRassumest hatcashflows
    from eachprojectcanber ei
    nvestedattheIRRforthatpar t
    icul
    arproject.Thisunder l
    yi
    ngassumpt i
    oni sconsideredtobeaweaknessoft heIRRt echnique.Thecost
    ofcapi t
    alist
    heappr opri
    aterei
    nvestmentratebecauseitrepresent
    st heoppor tuni
    tycostforapr oj
    ectatagi venlevelofr
    isk.Theproblem wi t
    ht heIRRmet hodi
    st hat
    i
    tassumesahi gherdi scountrat
    eev enthoughaprojectmaynothav eagr eaterlev
    elofrisk.
    Answer( B)i
    sincor rectbecauseNPVandI RRmakei nconsist
    entaccept /rej
    ectdecisi
    onsf orindependentpr oj
    ects.WhenNPVi spositi
    v e,I
    RRexceedst hecostof
    capi t
    alandthepr ojectisacceptabl
    e.Answer( V)isi ncorr
    ectbecauset heNPVmet hodcanbeusedt or ankmut ual
    lyexcl
    usiv
    epr oj
    ects,wher easIRRcannot.The
    reinvest
    mentr ateassumpt i
    onscausesI RRt omakef aultyproj
    ectr ankingundersomeci r
    cumst ances. Answer( D)isincorr
    ectbecauseI RRisexpr essedasa
    per cent
    ageandNPVi ndoll
    arter
    ms.

    cxl
    i
    . Answer(B)iscor
    rect
    .Fortwomutual
    l
    yexclusi
    vepr
    oject
    s,t
    hecompanyshoul
    dunder
    taket
    heproj
    ectwi
    tht
    hehi
    ghestposi
    ti
    venetpr
    esentv
    alue.Pr
    ojectBhasa
    hi
    gherNPVt
    hanProj
    ectA.TheNPVsofbothpr
    oject
    sar
    ecalcul
    atedusi
    ngt
    hefi
    rm'
    s8%costofcapi
    tal
    asfol
    l
    ows:

    =$41,
    331

    =$76,816
    Answer(A)isincor
    rectbecauset
    heNPVmet
    hodr
    anksBov
    erA.Answer(
    C)i
    sincor
    rectbecauset
    hepr
    oject
    sar
    emut
    ual
    l
    yexcl
    usi
    ve.Answer(
    D)i
    sincor
    rectbecause

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page133of133
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    bot
    hpr
    oject
    shav
    eposi
    ti
    veNPVsandoneshoul
    dbesel
    ect
    ed.

    cxl
    i
    i 71. Answer(C)i scorrect
    .Independentproj
    ectsarethosewhosecashf l
    owsarenotaf fectedbytheacceptanceornonacceptanceofotherpr
    oject
    s.The
    companymustdeci dewhet hertoacceptort orej
    ecteachoftheproj
    ects.Becausebothproj
    ectshav eaposit
    iveNPVcal cul
    atedusi
    ngthefir
    m's8%costofcapit
    al,
    bothshoul
    dbeaccept ed.
    Answer(A)isincor
    rectbecauseeachpr oj
    ecthasaposi t
    iveNPVandbot hshouldbeunder
    taken.Answer(B)isincor
    rectbecauseeachpr
    ojecthasaposi
    ti
    veNPVand
    bothshoul
    dbeunder taken.Answer(D)isincorr
    ectbecauseeachpr
    ojecthasapositi
    veNPVandbot hshoul
    dbeunder t
    aken.

    cxl
    i
    ii. Answer(
    C)iscorrect.TheIRRisthediscountrateatwhichthenetpresentval
    ueiszero.TheNPVi sthepresentval
    ueoffut
    urecashfl
    owsminusthepresent
    val
    ueofthei
    nvestment.Becauseofapossibl
    ediffer
    enceinthescal
    eofthepr oj
    ect
    sandotherfactor
    s,ahi
    gherNPVdoesnotnecessari
    lyr
    esul
    tinahi
    gherI
    RR.
    Answer(A)i
    sincorr
    ectbecauset heranki
    ngofIRRsi sindet
    ermi
    nate.Answer(B)isincor
    rectbecauset
    her anki
    ngofIRRsisi
    ndeter
    minat
    e.Answer(
    D)isincor
    rect
    becauset
    heranki
    ngforpay backper
    iodsisi
    ndeter
    mi nat
    e.

    cxl
    i
    v . Answer( B)iscorr
    ect.Eachofthethr
    eealter
    nati
    vesareweight
    edbythei
    rpr
    obabi
    li
    ti
    es:
    $10,000x. 40= $4,
    000
    4,
    000x. 40= 1,
    600
    -
    2,000x. 20= -
    400
    $5,
    200
    Answer( A)isincor
    rectbecause$5,600fai
    lstodeductforthepossi
    bil
    i
    tyofanegat
    iveret
    urn.Answer(
    C)i
    sincor
    rectbecause$6,
    000adds,r
    athert
    handeduct
    s,t
    he
    negati
    ver et
    urn.Answer( D)isi
    ncorr
    ectbecausetheansweris$5,
    200.

    cxl
    v. Answer( D)iscorr
    ect.Themachinecosts$160,
    000andwi llrequi
    re$30,000toinst
    allandtest.I
    naddi
    ti
    on,thecompanywil
    lhav
    et oi
    nvesti
    n$35,
    000ofworki
    ng
    capi
    talt
    osuppor ttheproduct
    ionoft
    henewmachi ne.Thus,thetotali
    nvest
    mentnecessaryis$225,000.
    Answer( A)isincorr
    ectbecause$190,000ignor
    est heinvest
    menti nworkingcapital
    .Answer( B)isi
    ncor
    rectbecause$195,
    000ignor
    esthe$30,
    000ofshi
    pping,
    i
    nstal
    lat
    ion,andtesti
    ngcosts.Answer(C)i
    sincor
    rectbecause$204,525isthepresentval
    ueof$225,000at10%f or1year
    .

    cxl
    vi. Answer(A)i
    scorrect.Gunni
    ngusesst r
    aight-
    li
    nedepreci
    ati
    on.Thus, t
    heannualchargeis$38,000[(
    $160,000+$30, 000)÷5years]
    ,andt
    hetaxsavi
    ngsis$15,
    200
    (40%x$38,000)
    .Thatbenefitwi
    llberecei
    vedin1y ear
    ,sothepresentvalueis$13,817($15,
    200taxsavingsx.909presentval
    ueof$1f or1y
    earat10%)
    .
    Answer(B)isincorr
    ectbecause$16, 762isgr eat
    erthantheundi scountedtaxsav i
    ngs.Answer( C)isincorr
    ectbecause$20,725assumesa60% t axrat
    e(the
    complementoftheactual40%rate)
    .Answer( D)isi
    ncorr
    ectbecause$22, 800assumesa60%t axr at
    eandnodi scount
    ing.

    cxl
    vii
    .Answer( D)iscorr
    ect.Thenewmachinewilli
    ncreasesal
    esby20, 000unitsay ear.Theincr
    easeinthepret
    axtotalcontr
    ibuti
    onmargi
    nwillbe$200,000peryear
    [
    20,000unitsx($40SP-$30VC) ]
    ,andtheannualincr
    easeintheafter-
    taxcontri
    buti
    onmar ginwil
    lbe$120,
    000[(1.
    0-. 4)x$200,000]
    .Thepr
    esentvalueoftheafter
    -
    taxi
    ncreaseint
    hecontri
    buti
    onmarginovert
    he5-yearusef
    ulli
    feofthemachi neis$454,920($120,
    000x3.791PVofanor di
    naryannui
    tyf
    or5yearsat10%).
    Answer( A)isi
    ncorr
    ectbecause$242,
    624deduct sfi
    xedcostsfrom thepr etaxcontri
    buti
    onmar gi
    nandappl i
    esa60% t axr at
    e.Answer(
    B)i si
    ncorrectbecause

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page134of134
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $303,
    280deductsfi
    xedcostsfr
    om theaft
    er-
    taxcont
    ri
    buti
    onmar gi
    nbef
    oredi
    scount
    ing.Answer(
    C)i
    sincor
    rectbecause$363,
    936deduct
    sfi
    xedcost
    sfr
    om t
    he
    contr
    ibut
    ionmar
    ginbef
    orecal
    cul
    ati
    ngtaxesandthepr
    esentval
    ue.

    cxl
    vii
    i.Answer( C)iscorrect
    .The$35, 000ofwor ki
    ngcapi talrequir
    esani mmediat
    eout l
    ayforthatamount,buti
    twillberecov
    eredin5y ears.Thus,thenetdiscounted
    cashout f
    lowis$13,265[$35,000init
    ialinvest
    ment-( $35,000f ut
    ureinfl
    owx.621PVof$1f or5yearsat10%)]
    .
    Answer( A)isincorrectbecause$( 7,959)assumest hei ni
    ti
    alinvestmentanditsretur
    nar ereducedbyapplyi
    nga40% t axr at
    e.Answer( B)isincorrectbecause
    $(10,080)assumest heini
    ti
    alinvestmentwasdi scountedf or1y ear.Answer(D)isincorr
    ectbecause$(35,
    000)fail
    stoconsiderthatt
    he$35, 000willber ecov
    ered
    (essenti
    all
    yintheform ofasalvagev alue)aft
    erthefift
    hy ear.
    cxl
    i
    x
    .
    $38,
    000/
    $11,
    607=3.
    27
    cl
    . NPV=(
    3,605x$11,
    607)-$38,
    000=$3,
    843
    cl
    i
    .$400,
    000/
    $125,
    000=3.
    2year
    s
    cl
    i
    i
    .
    I
    nvest
    ment (
    $400,000)
    Pr
    esentval
    ueofcashi
    nfl
    ows(
    $125,
    000x3.
    605) 450,625
    Netpr
    esentval
    ue $50, 625
    cl
    i
    ii
    .$30,
    000/
    $9,
    000=3.
    33
    cl
    i
    v
    .NPV=(
    3.170x$9,
    000)+(
    0.683x$2,
    000)-$30,
    000=$(
    104)
    cl
    v
    .Cashfl
    ows=( $20,
    000x0.
    6)+(
    $30,
    000/
    5x0.
    4)=$14,
    400
    $30,
    000/$14,
    400=2.08
    cl
    vi
    .Cashf
    lows=($20,
    000x0.6)+($30,
    000/
    5x0.4)=$14,
    400
    NPV=($14,
    400x3.127)-$30,
    000=$15,
    029
    cl
    vi
    i
    .2+$8,
    000/
    $16,
    000=2.
    50
    cl
    vi
    ii
    .(
    $20,
    000x0.
    877)+(
    $22,
    000x0.
    769)+(
    $16,
    000x0.
    675)+(
    $30,
    000x0.
    592)+(
    $30,
    000x0.
    519)-$50,
    000=$28,
    588
    cl
    i
    x
    .Cashfl
    ow=( $15,
    000x0.6)+(
    $30,
    000/
    5x0.
    4)=$11,
    400
    $30,
    000/$11,
    400=2.63
    cl
    x
    .($15,
    000x0.60)+(
    $30,000/
    5x0.
    40)=$11,
    400
    CMAEXAMI NATIONQUESTIONS Page135of135
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    cl
    xi
    .$9,
    000/
    (.5x$20,
    000)=90%
    cl
    xi
    i
    .NPV=(
    $30,
    000-$16,
    000)x2.
    914-$20,
    000=$20,
    796

    cl
    xi
    ii. Answer(D)iscor
    rect
    .Thepay backmethodeval
    uat
    esi
    nvest
    mentsonthel
    engt
    hoft i
    meunti
    ltot
    aldol
    l
    arsinv
    estedar
    erecoupedinthef
    orm ofcashi
    nfl
    oworcash
    outf
    lowsavoided.I
    tiscalculat
    edasIni
    ti
    alI
    nvest
    ment Annual
    cashi
    nfl
    owofaproject
    .Thepaybackper
    iodoftheequi
    pmentunderconsi
    der
    ationbyTam i
    s:
    $100,000 $20,000=5y ears.

    cl
    xi
    v . Answer( C)i scorrect.Thei nt
    ernalrateofreturn(IRR)deter
    mi nestherateofdiscountatwhicht hepresentval
    ueoft hefut
    urecashflowswi l
    lexactlyequalt
    he
    i
    nv estmentoutlay.Iti
    scomput edbysettingupt hefoll
    owingequation.
    I
    nit
    iali
    nvestment=TVMFxCashf lows
    andsol vi
    ngfort hetimev alueofmoneyf actor(TVMF) .TheIRRcant henbef oundbyl ocat
    ingtheTVMFf or(n)per
    iodsinthepresentvalueofanor dinar
    yannuit
    y
    tableandtraci
    ngt othet opofthatcolumnt of i
    ndt herateofr
    eturn.Theproblem asksfortheTVMFf ort
    heI RRoftheequi
    pment ,
    whichiscalcul
    atedasf oll
    ows:
    $100,
    000=TVMFx$20, 000
    5.
    00=TVMF
    I
    nest imati
    ngt heIRR,thef act
    orsinthetableofpr esentval
    uesofanannui t
    yshoul dbetakenfrom thecolumnsclosesto5.00

    cl
    xv. Answer( D)iscorr
    ect.Theaccount ingr at
    eofr etur
    n(ARR)comput esanapproxi
    mater at
    eofr etur
    nwhichignor
    estheti
    mev al
    ueofmoney.I
    tiscal
    cul
    atedas
    Expectedincreaseinannual netincome Av erageinvestmenti
    naproj ect.Tam’
    sexpectedincreaseinannuali
    ncomeisasfol
    lows:
    Annual savi
    ngsinafter-
    taxcashcost s $20,000
    Annualdepr eci
    ati
    ononequi pment( $100,000 10 (
    10,000)
    years)
    I
    ncr easeinannualnetincome $10,000
    A$100, 000investmenti
    sr equiredtopurchaset heequipment.Thus,theARRoft heequipmentunderconsider
    ati
    onbyTam is$10,
    000 $100,
    000=10%.

    cl
    xvi. Answer( A)iscorrect
    .Thenetpr esentval
    ueisequalt othesum ofdiscountedcashi nflowsminusanydiscountedcashoutfl
    ows.Ignoringtheeffectsof
    depreciati
    ononcashout fl
    owsfortaxpayments,t
    henetpresentval
    ueofthi
    sinvest
    mentis$79, 200{[
    80,
    000unit
    sx($2.50-$1.50)
    ]x(
    .91+.83+. 75)-$120,
    000}
    Answer( B)i si
    ncor
    rectbecause$120,
    000i st
    hepurchasepri
    ceofthemachine,notthenetpresentval
    ueofthei
    nvestment.Answer(
    C)isincor
    rectbecause$129,000
    i
    sdet ermi nedbyusing100,000machi nehoursi
    nsteadof80,000unit
    s.Answer( D)isincor
    rectbecause$199,
    200r esul
    tswhenthe$120,000cashout fl
    ow isnot
    subt
    r acted.

    cl
    xvii
    .Answer( C)iscor
    rect
    .Theaccount
    ingrat
    eofret
    urnequal
    sproj
    ectednetprof
    itdiv
    idedbyt
    heaveragei
    nvest
    ment.Theuni
    tlaborcostexpect
    edtobesav edis
    $1.00($2.
    50-$1.50)
    ,and80,
    000machi nehour
    sist
    heproducti
    vecapaci
    ty.Gi
    venthatoneuni
    tispr
    oducedperhour
    ,$80,
    000shouldbesav edpery
    ear.Thus,the
    accounti
    ngrat
    eofret
    urnis

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page136of136
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer( A)i
    sincorrectbecause10%i sthecostofcapital,nottheaccount
    ingr ateofr
    etur
    nont heaverageinv
    estmentfort
    he3-y
    earper
    iod.Answer(B)i
    sincorr
    ect
    because33%r esul
    tsfrom di
    vidi
    ngt heannuallaborcostsav i
    ngsmi nusdepreciati
    onbythecostofthemachi neinst
    eadoftheaver
    ageinvest
    ment.Answer(D)is
    i
    ncorrectbecause80%r esul
    tsfrom div
    idi
    ng80,000machi nehour susedby100,000machinehoursavai
    lable.

    cl
    xvii
    i.Answer(A)iscorrect
    .Thepaybackper i
    od(i
    ny ears)ist
    heannualnetcashinfl
    owdivi
    dedint
    othei ni
    ti
    alcashinvestment.Thus,t
    hepay backperiodis1.5years
    ($120,
    000÷$80,000).
    Answer(B)i
    sincorrectbecause1.20yearsequal
    st hecostofthemachinedivi
    dedbytheannualpr
    oduct i
    oncapacity($120,
    000÷100, 000)
    .Answer( C)i
    sincor
    rect
    because2.
    00y ear
    sequal sthecostofthemachinediv i
    dedbytheaver
    ageinvestment{
    $120,
    000÷[ ($120,000-0)÷2]}.Answer( D)i
    sincorrectbecause3.00years
    equalst
    hecostofthemachi nedi
    videdbytheannualnetcashinf
    lowminusdepreci
    ati
    on[
    $120,000÷($80,000-$40,000)
    ].

    cl
    xi
    x. Answer( D)iscorrect
    .Theaccountingrateofr etur
    n(unadj ust
    edrateofr etur
    norbookv aluerat
    eofretur
    n)equalsaccount
    ingneti
    ncomedivi
    dedbytherequi
    red
    averagei
    nvest
    ment .Theaccountingrateofr eturnignor
    est heti
    mev alueofmoney .Theaver
    ageincomeov er5y ear
    sis$43,000peryear[
    ($35,
    000+$39,000+
    $43,
    000+$47,000+$51, 000)÷5].Hence,theaccount i
    ngr ateofretur
    ni s34.4%[$43,000÷($250,
    000÷2) ]
    .
    Answer(A)isincorrectbecause12.0% i
    st hedi scountrate.Answer( B)i sincor
    rectbecause17.2% equal
    s$43,000divi
    dedby$250,000.Answer(C)i
    sincorr
    ect
    because28.
    0%equal s$35,000div
    idedby$125, 000.

    cl
    xx. Answer(A)iscorrect
    .TheNPVi st hesum ofthepresentval
    uesofallcashinf
    lowsandout fl
    owsassoci atedwi tht
    hepr oposal.IftheNPVi sposit
    ive,
    theproposal
    shoul
    dbeaccepted.TheNPVi sdet
    ermi nedbydiscount
    ingeachexpectedcashflowusi ngt heappropri
    ate12%i nter
    estfactorfort hepresentval
    ueof$1.Thus,the
    NPVis$106,
    160[(.
    89x$120, 000)+(.80x$108,000)+( .
    71x$96,000)+(.64x$84,000)+( .57x$72,000)-( 1.
    00x$250, 000)].
    Answer(
    B)isincorrectbecause$(97,970)isbasedonneti ncomei nst
    eadofcashf l
    ows.Answer( C)isi ncorrectbecause$356, 160excl udesthepurchasecost.
    Answer(
    D)isi
    ncorrectbecause$96,560equalsaverageafter
    -t
    axcashinfl
    owtimest heinterestf
    actorforthepr esentval
    ueofa5- y earannuit
    y ,
    minus$250,000.

    cl
    xxi. Answer(B)iscorrect
    .Thet r
    aditi
    onalpaybackperiodisthenumberofper iodsr equir
    edfortheundiscountedexpectedcashflowstoequaltheori
    ginali
    nvestment.
    Whenperiodiccashflowsarenotexpect edtobeuni form,acumul ati
    vecal
    culationisnecessary.Thefirstyear'
    scashinfl
    owis$120,000.Addi
    nganother$108, 000i
    n
    Year2bri
    ngst hetotalpaybackafter2y ear
    sto$228, 000.Accordingl
    y,t
    hetraditionalpaybackperi
    odi sabout2.23y ear
    s{2+[ (
    $250,000-$228,
    000)÷$96, 000cash
    i
    nfl
    owi nyear3]}
    .
    Answer(A)isincorr
    ectbecauset he5- y
    eartotalexpectedcashi nfl
    owis$480, 000.Answer( C)isincorrectbecausethetot
    alexpectedcashflowfor1.65y earsi
    s
    $190,
    200.Answer(D)i si
    ncorrectbecausethetotalexpectedcashf l
    owfor2.
    83y earsis$307,680.

    cl
    xxii
    .Answer(C)i
    scorrect
    .Thet
    radi
    ti
    onalpay
    backper
    iodisthenumberofyear
    srequi
    redtocomplet
    etheretur
    noftheori
    ginali
    nvest
    ment.I
    tequal
    sthenetinv
    estment
    di
    videdbyt
    heav er
    ageexpect
    edperiodi
    cnetcashflow.Theperi
    odicnetcashinf
    low equal
    sthe$125,000annualsavingsminust
    headditi
    onaltaxespaid.Thi
    s

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page137of137
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $125,000i ncr
    easei npr et
    axincomewi l
    lber educedbyani ncreaseindepreci
    ati
    onof$40,000[($250,000cost-$50,
    000salvage)÷5y ears]
    .Hence,t
    axeswil
    li
    ncrease
    by$34, 000[$40%x( $125,000-$40,
    000)],andt heafter
    -t
    axper i
    odi
    cnetcashinflowwi l
    lbe$91,
    000( $125,000-$34,
    000).Accordi
    ngly
    ,thepaybackper
    iodi
    s2.75years
    ($250,000÷$91, 000) .
    Answer( A)isincorrectbecause2. 00y earsdoesnotconsi dercashflowsf ortaxes.Answer(B)i sincorr
    ectbecause2.63y earsomitsresi
    dualval
    uefrom the
    depreciati
    oncalculation.Answer(D)isi
    ncor rectbecause2.94yearstr
    eatsdepreci
    ationasanegativecashf l
    owandignorestaxes.

    cl
    xxii
    i.Answer( C)iscorrect.Theaccountingr at
    eofreturnequalsannualafter
    -t
    axnetprof
    itdi
    videdbyav er
    ageinvest
    ment .Annualaft
    er-
    taxnetprofi
    tequals$51,
    000
    [
    ( $125,000costsav ings-$40, 000depr eci
    ati
    onascal culat
    edint heprecedi
    ngquesti
    on)x( 1.
    0-0. 4)
    ].Consequentl
    y,theaccounti
    ngr at
    eofr et
    urnequals40.8%
    [
    $51, 000÷( $250,000investment÷2) ]
    .
    Answer( A)isi
    ncor r
    ectbecause20. 4%i stheaccounti
    ngr at
    eofret ur
    nusingtheor
    igi
    nali
    nvestment.Answer(B)isincorr
    ectbecause34.0%result
    sfrom addi
    ngthe
    residualvaluetotheorigi
    nal i
    nvest
    ment .Answer(D)isincorr
    ectbecause51.0%assumesanav eragei
    nvestmentof$100,000.

    cl
    xxi
    v . Answer( A)iscorrect.TheNPVoft hestampingmachi nei st heexcessoft hepresentval
    uesoft heesti
    matedcashi nfl
    owsoverthenetcostoft
    he
    i
    nvestment.Theannual af
    ter-
    taxnetcashinfl
    owf r
    om thecostsav i
    ngsis$91, 000.Int
    hefift
    hyear,t
    hecashinf
    lowswill
    alsoincl
    udetheresi
    dualv
    alue.
    Year CashFl ow PVFactor PVofCashFl ow
    Amount s
    0 $(250,000) 1.
    000 $(250,000)
    1 $91,000 .
    909 82,
    719
    2 $91,000 .
    826 75,
    166
    3 $91,000 .
    751 68,
    341
    4 $91,000 .
    683 62,
    153
    5 $91,000+ .
    621 87,
    561
    $50,000
    Net present $125,940
    val
    ue
    Answer(B)isi ncor
    rectbecause$200, 000isthecostofthemachi nemi nusr esi
    dualv
    alue.Answer(C)isincorr
    ectbecause$250,000isthecostoft
    hemachine.
    Answer(D)isincorr
    ectbecause$375, 940ist
    heNPVoft hemachi neplusi t
    spur chasepr
    ice.

    cl
    xxv .Answer( C)iscorr
    ect.Thepaybackperi
    odistheti
    merequiredtor ecovertheini
    tialinvest
    ment .Thenetcashinf
    lowsusedtodet er
    minethepaybackperiodarenot
    discounted.Theini
    ti
    alcostwas$105,000,andinfl
    owsduringthefirst2yearswer e$95, 000( $50,000+$45,000)
    .Thus,t
    hef i
    rst$10,
    000($105,
    000-$95, 000)ofthe
    thir
    dy ear'
    snetcashinfl
    owswi l
    lcomplet
    etherecover
    yoftheini
    tiali
    nvestment .Thi
    samounti sone- f
    our
    thofthethi
    rdyear
    'sinf
    lows.Hence,
    thepaybackper i
    odis2.25
    years.
    Answer( A)isincor
    rectbecausethepaybackperi
    odis2.
    25y ears.Answer( B)isincorrectbecauset hepaybackperi
    odis2.25years.Answer(D)i
    si ncor
    rectbecause
    thepay backperi
    odis2.25years.

    cl
    xxv
    i.Answer(
    C)i
    scor
    rect
    .Thi
    spr
    obl
    em r
    equi
    rest
    heuseoft
    henetpr
    esentv
    alue(
    NPV)met
    hodofi
    nvest
    mentanal
    ysi
    s.Theobj
    ect
    ivei
    stodet
    ermi
    newhatav
    erage

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page138of138
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    annualnetcashi nfl
    owwi l
    lequaltheinit
    ialcostwhendi scountedatarateof24%.Gi v
    ent hattheinv
    estmenthasanexpectedli
    feof5y ear
    s,t
    heappr opr
    iat
    etimev alue
    ofmoneyf act orist hatforthepresentvalueofanor dinaryannuityf
    or5y earsat24%.Inthiscase,t
    heannualnetcashinf
    lowisunknown,buttheproductofthefactor
    (2.
    74)andt hei nfl
    ow i s$105,000.Thus,di vidi
    ng$105, 000by2. 74resultsinanav er
    ageannualnetcashi nfl
    ow of$38,321.Inotherwords,ifannuali
    nflowsar e
    $38,
    321pery ear ,thepr esentvalueis$105, 000.Thispresentvalueisequalt othei
    niti
    alcost,andthenetpresentval
    ueiszero.Atanetpr esentval
    ueofzer o,the
    i
    nvestorisindifferentast owhethertounder t
    aketheinvestment.
    Answer( A)i sincor rectbecauset heav erageannualnetcashi nfl
    ow i
    s$38, 321.Answer( B)isincorr
    ectbecausetheav er
    ageannualnetcashi nfl
    ow i
    s$38, 321.
    Answer(D)i sincor rectbecauset heaverageannual netcashinfl
    owi s$38,321.

    cl
    xxvii
    .Answer(B)iscorrect
    .Theaccount i
    ngr ateofretur
    n( orunadjustedrat
    eofreturn)iscomput edbydi vi
    dingtheannuali
    ncreasei
    naccounti
    ngnetincomebyt he
    requi
    redinv
    estment.Theav er
    agenetincomeov ertheli
    feoftheinv est
    mentis$19,
    000[ ($15,000+$17,000+$19, 000+$21,000+$23,000)÷5year
    s].Consequently
    ,
    theaccounti
    ngrateofret
    urnis18.1%($19,000÷$105, 000).
    Answer(A)isincor
    rectbecausetheaccountingrateofretur
    nis18. 1%.Answer(C)isincorrectbecausetheaccounti
    ngrateofret
    urni
    s18.1%.Answer(D)isincor
    rect
    becausetheaccounti
    ngrateofretur
    nis18.1%.

    cl
    xxvii
    i.
    Answer( B)iscorrect
    .Thenetpr esentvalueiscomputedbydeduct
    ingtheini
    ti
    alcostoftheinvest
    mentfr
    om thepresentvalueoft
    hefutur
    enetcashinfl
    ows.The
    presentv al
    ueofeachoft hefutur
    enetcashi nf l
    owsisdet
    erminedbymulti
    ply
    ingitbytheappropri
    atefact
    orf
    orthepresentvalueofanamountasshownbel ow.The
    netpr esentvalueis$10,450($115,450-$105, 000).
    $50,000x. 81 $40, 500
    =
    45,000x. 65 29, 250
    =
    40,000x. 52 20, 800
    =
    35,000x.42 14, 700
    =
    30,000x. 34
    = 10, 200
    Tot al
    s $115, 45
    0
    Answer( A)i
    si ncorr
    ectbecausethenetpr esentv al
    uei
    s$10,450.Answer(C)isi
    ncorrectbecausethenetpr
    esentval
    uei s$10,450.Answer(D)i
    sincor
    rectbecause
    thenetpr esentv al
    ueis$10,450.

    cl
    xxi
    x.Answer(B)iscor r
    ect
    .
    Operat
    ingrevenues $800,
    000
    Lessdepreci
    ation $400,
    000
    Bookincome $400,
    000

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page139of139
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Cashf l
    ow $800,000
    Averagebooki ncome $400,000
    Averagebookv al
    ueofinvest
    ment= ( $4,
    000,
    000+0) $2, 000,000
    ÷2
    Bookr ateofretur
    n=$400,000÷$2, 000,
    000= 20%
    Answer( A)isincorr
    ectbecause10%i sbasedonini
    ti
    alcostrat
    herthanaveragebookval
    ue.Answer(C)i
    sincor
    rectbecause28%isnotbasedonav er
    agebookv
    alue,
    nordidtheytreatexpensesproper
    ly.Answer(D)i
    sincor
    rectbecause35%i snotbasedonaver
    agebookval
    ue,nordidtheytr
    eatexpensespr
    oper
    ly.

    cl
    xxx.Answer( C)iscor r
    ect.Thediscountedpay backper
    iodi
    st henumberofy earsneededtogetthePVoft hecashf l
    owstoequaltheini
    ti
    ali
    nvestment
    .Ata14%
    di
    scountrat
    e,thisoccursat9.
    2y ears.
    Answer(A)isincorr
    ectbecauseittakes9.2y earst
    oreachthediscountedpaybackperi
    od.Answer(B)isi
    ncorr
    ectbecausei
    ttakes9.
    2y ear
    storeachthedi
    scount
    ed
    paybackper
    iod.Answer( D)i
    sincorrectbecauseitt
    akes9.
    2y ear
    st oreachthediscount
    edpaybackper
    iod.

    cl
    xxxi
    .Answer( A)iscorr
    ect.NPV: presentval
    ueofcashfl
    owsat14%=$800,
    000(5.
    216)=$4,172,
    800.
    NPV=$4, 172,
    800-$4,000,000=$172, 800.
    Answer(B)isincor
    rectbecauseata14%hur dl
    er at
    e,t
    heNPVis$172,
    800.Answer(C)i
    sincorr
    ectbecauseata14%hur
    dler
    ate,t
    heNPVi
    s$172,
    800.Answer(
    D)i
    s
    i
    ncorr
    ectbecauseata14%hur dlerate,t
    heNPVis$172,800.
    cl
    xxxi
    i
    . [
    $8,
    000–(
    $19,
    200/
    3)]
    /$19,
    200=8.
    33%
    cl
    xxxi
    i
    i
    . NPV=(
    $8,
    000x2.
    487)-$19,
    200=$696
    cl
    xxxi
    v
    . $19,
    200/
    $8,
    000=2.
    40,
    whi
    chi
    sthepvf
    act
    orf
    orn=3,
    i=12%
    cl
    xxxv
    . Neti
    ncome=($14,
    389-$8,
    000)x0.
    6=$3,
    833.
    40
    $3,
    833.
    40/
    $40,
    000=9.58%
    cl
    xxxv
    i
    . Cashflow=($14,
    389x0.6)+(
    $40,
    000/
    5x0.
    4)=$11,
    833.
    40
    $11,
    833.
    40x3.605-$40,
    000=$2,
    659
    cl
    xxxv
    ii
    . Cashfl
    ow=( $14,
    389x0.
    6)+($40,
    000/
    5x0.4)=$11,
    833.
    40
    $40,
    000/$11,
    833.40=3.
    380,
    whichist
    hepvfact
    orf
    orn=5andi bet
    ween14and16per
    cent
    .
    cl
    xxxv
    ii
    i
    .(
    $14,
    389x0.
    60)+[
    ($40,
    000/
    5)x0.
    40]=$11,
    833
    cl
    xxxi
    x
    . NI=(
    $31,
    294-$20,
    000)x0.
    6=$6,
    766.
    40

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page140of140
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $6,
    766.
    40/
    $80,
    000=8.
    47%
    cxc
    .Cashfl
    ow=($31,294x0.
    6)+($80,
    000/4x0.
    4)=$26,
    776.
    40
    $26,
    776.
    40x3.037-$80,
    000=$1,320
    cxci
    .
    Cashfl
    ow=( $31,
    294x0.6)+($80,000/4x0.
    4)=$26,776.
    40
    $80,
    000/$26,
    776.
    40=2.988,whichisthepvf
    actorf
    orn=4andIbet
    ween12and14per
    cent
    .
    cxci
    i
    .
    ($31,
    294X0.
    60)+[
    ($80,
    000/
    4)x0.
    40]=$26,
    776

    cxci
    ii.Answer( C)iscor r
    ect.Fi
    rst
    ,calcul
    atetheannual ear
    ningsandcashf l
    ows:
    Operatingr evenues $400,000
    Lessdepr eciation 300,000
    Booki ncome 100,000
    Cashf low 400,000
    Thepay backper i
    odi nthi
    scasei sequaltothei nv
    estmentdivi
    dedbyt heannualoper
    atingcashf
    lowsthatresul
    tfrom thatinv
    estment
    .Thus,$1,500,
    000÷$400,
    000i
    s
    3.75years.
    Answer( A)i sincorrectbecauset heini
    ti
    ali
    nv estmentisdivi
    dedbyt heannualcashflows.Answer(B)isi
    ncorrectbecause2. 14r
    esul
    tsfrom addingdepr
    eci
    ati
    ont
    o
    revenuesforusei nthedenomi nator
    .Answer( D)isi
    ncorr
    ectbecauset hedenominat
    orisannualcashf
    lows,notdepreciat
    ion.

    cxci
    v.Answer( B)iscor r
    ect
    .Fir
    st,cal
    cul
    atetheannualear
    ningsandcashf lows:
    Operati
    ngr evenues $400,000
    Lessdepreciation 300,000
    Bookincome 100,000
    Cashflow 400,000
    Theav er
    agebooki ncomeis$100,000.Theaveragebookv al
    ueofinvestmentis($1,500,000+0)÷2, or$750,000.Thus,thebookrat
    eofr et
    urnisequalto$100,
    000÷
    $750,000=13. 33%.
    Answer( A)isincorrectbecause6.67%usedt heenti
    reinvest
    menti nthedenomi natorinsteadoft
    heav erageinvestment.Answer( C)isincor
    rectbecause16.
    67%
    usesbothani ncorrectnumeratoranddenominator
    .Answer(D)isincorr
    ectbecause26. 67%usesrevenueinthenumer atorinst
    eadofincome.

    cxcv. Answer( B)i


    scor r
    ect.Fi
    rst
    ,cal
    culat
    etheannual
    earni
    ngsandcashflows:
    Operat
    ingrevenues $400,
    000
    Lessdepreci
    ation 300,
    000
    Bookincome 100,
    000
    Cashflow 400,
    000
    Thecashf l
    owsassoci at
    edwi t
    htheinvest
    mentarethendi
    scount
    edaccordi
    ngl
    y:

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page141of141
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Amount Di
    scount Present
    Factor Value
    Year0i
    nit
    ial
    inv
    est
    ment - 1.000 -
    $1,
    500,
    000
    $1,500,
    00
    0
    Years1t hrough5cash $400, 000 3.
    605 $1,442,
    000
    fl
    ow
    NetPresentVal ue -
    $58,
    000
    Answer(A)isi ncor
    r ectbecausethereisanegati
    veNPV.Answer(C)i
    sincor
    rectbecause-
    $116,
    000ov
    erst
    atest
    henegat
    iveNPV.Answer(
    D)i
    sincor
    rectbecause
    $1,
    442,000isthepr esentvalueofthefutur
    ecashfl
    ows,nott
    heNPV.

    cxcvi.Answer( A)i
    scor r
    ect.First
    ,calcul
    atetheannual earni
    ngsandcashf l
    ows:
    Oper at
    ingrev enues $400,000
    Lessdepr eciation 300,000
    Booki ncome 100,000
    Cashf low 400,000
    I
    RRi scalculatedbyt r
    ial
    ander ror.Calcul
    atet heNPVatdi ffer
    entdi scountrat es.
    NPVat10% =$400, 000(di
    scountf actorf or10%, 5y ears)-$1, 500,000
    =$400, 000(
    3.791)-$1,500, 000=$16, 400
    NPVat11% =$400, 000(3.
    696)-$1, 500, 000
    =-$21,600.
    Thus,IRRl i
    esbetween10%and11%.I RR=10+[ 16,
    400÷( 16,400+21, 600)]=10. 43%.Byi nt
    erpol
    ati
    on,theact
    ualIRRappearst
    obe10.43%.
    Answer( B)isincor r
    ectbecausei tusessomet hingot herthancashf l
    owsi nt hecalculat
    ion.Answer(C)isincor
    rectbecausei
    tusessomethi
    ngot
    hert
    hancashf
    lowsi
    n
    thecalculat
    ion.Answer( D)i si
    ncorrectbecausei tusessomet hingot herthancashf l
    owsi nthecal
    culat
    ion.

    cxcvii
    .Answer(B)i scor r
    ect.Theaccounti
    ngr ateofreturn(theunadjust
    edr at
    eofr etur
    norbookv aluerateofret ur
    n)equalstheincreasei naccounti
    ngnetincome
    divi
    dedbyeithertheinit
    ialort
    heaverageinvestment.Iti
    gnoresthetimevalueofmoney .Theaverageincomeov er5y ear
    sis$86,000[($70,000+$78,000+$86,000+
    $94,000+$102, 000)÷5] .Di
    vi
    dingthe$86,000averageneti ncomebythe$250,000av erageinv
    estment( $500,
    000cost÷2)pr oducesanaccount ingrat
    eofretur
    nof
    34.4%.
    Answer( A)i
    sincorrectbecause84.9%equalstheNPVdi vi
    dedbytheav er
    ageinvestment.Answer( C)isincorr
    ectbecause40.8%equal sy ear5netincomedi
    v i
    dedby
    theaveragei
    nv estment.Answer(D)isi
    ncorrectbecause12%equal stheafter
    -t
    axtargetrateofret
    urn.

    cxcvi
    ii
    .Answer( B)iscor
    rect
    .TheNPVmet hoddiscountstheexpect
    edcashfl
    owsf r
    om aprojectusingt
    herequir
    edr
    ateofret
    urn.Aproj
    ectisacceptabl
    eifi
    tsNPVi
    s
    posit
    ive.Basedontheint
    erestfact
    orsf
    orthepresentvalueof$1at12%andtheannual
    aft
    er-taxcashf
    lows,t
    heNPVoftheproj
    ectov
    erits5-y
    earli
    feis
    $240,000x.89 $213, 60
    = 0
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page142of142
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    216,
    000x.
    80= 172,
    800
    192,
    000x.
    71= 136,
    320
    168,
    000x.
    64= 107,
    520
    144,
    000x.
    57=
    82,
    080
    Tot
    al pr esent $712,32
    val
    ue 0
    Purchasecost
    (500,
    000
    )
    NPV $212,32
    0
    Answer( A)isincorr
    ectbecause$304,
    060ist
    hepresentv
    alueoft
    henetincomeamount s.Answer(C)isincor
    rectbecause$(70,
    000)i
    st heexcessoft
    heneti
    nit
    ial
    i
    nvestmentov erthesum oftheundi
    scount
    edneti
    ncomeamounts.Answer(D)i
    sincor
    rectbecause$712,
    320isthepresentval
    ueofthecashinf
    lows.

    cxci
    x.Answer( B)iscor r
    ect.Thepaybackperiodist
    henumberofy earsrequiredtocompl etet her eturnoft heor i
    ginali
    nv estment.Thecashflowsar enotti
    meadj usted.
    Whent heannualcashf l
    owsarenotuni f
    orm,acumulativecomput ati
    oni snecessary.Thus,t het otalpay backaf t
    er2y earsi
    s$456,000($240,000+$216, 000),and
    another$44,
    000( $500,000-$456,000)mustberecoveredinthet hi
    rdy ear
    .Thet hi
    rdy earf ractionisf oundbyassumi ngt hatcashfl
    owsoccurev enlyt
    hroughoutt he
    peri
    od.Divi
    ding$44,000byt he$192,000ofthi
    rdyeari
    nfl
    owsy i
    eldsar atioof.23.Hence, thepay backper iodis2.23y ears.
    Answer(A)isincorrectbecausethepaybackperi
    odwoul dexceed5y earsifthecal
    culationwer ebasedonneti ncomei nsteadofcashflows.Answer( C)isincorr
    ect
    because1.65yearsisbasedont hesum ofcashflowsandneti ncome.Answer( D)i
    sincor rectbecausei ti sbasedondi scount
    edcashflows--notactual
    cashflows.

    cc.Answer(D)iscorrect.Thepr ofi
    tabi
    li
    tyindexi
    st hepresentvalueoft heest
    imatednetcashinfl
    owsov ertheinvestment'
    slif
    edivi
    dedbyt hepresentval
    ueofthenet
    i
    nit
    iali
    nvestment.I
    ft heprofi
    tabil
    it
    yindexisgreatert
    han1. 0,t
    heinvestmentproj
    ectshouldbeaccepted.Thepresentvalueofthecashinfl
    owsis$712,320.Thus,t
    he
    pr
    ofit
    abil
    it
    yindexis1. 425($712,320÷$500,000netiniti
    ali
    nvestment).
    Answer(A)isincorrectbecause. 61isthepresentvalueoftheneti ncomeamount sdivi
    dedbyt henetini
    ti
    alinvestment.Answer(B)isi
    ncorr
    ectbecause.42isthe
    NPVdividedbytheneti nit
    iali
    nvestment.Answer(C)isincorr
    ectbecause.86isthesum oftheundiscount
    ednetincomeamount sdi
    videdbythenetini
    ti
    ali
    nvestment.

    cci
    .Answer(B)iscorrect
    .TheNPVatanaf ter-
    taxtar
    getrateofr et
    urnof12%i s$212,320.Gi
    venthatt
    heNPVi sposi ti
    ve,thei
    nvest
    mentprojectshouldbeaccept
    ed
    assumi
    ngnocapi talrat
    ioni
    ng.Further
    more,theIRR(t
    hedi scountrat
    ethatreducestheNPVto$0)mustbegr eaterthanthe12%hurdl
    eratethatproducedaposit
    ive
    NPV.Thehigherthediscountrat
    e, t
    helowertheNPV.
    Answer(
    A)i sincorr
    ectbecauset heIRRwoul dbe12%i ftheNPVwer e$0.Answer( C)isi
    ncorr
    ectbecausetheIRRwoul dbeunder12%i ftheNPVwer enegati
    v e.
    Answer(
    D)i sincorr
    ectbecausewhet hertheIRRisequalt o,l
    essthan,orgreat
    erthantheaft
    er-
    taxtar
    getrat
    eofr etur
    ncanbedet er
    minedf rom t
    heamountoft he
    NPV.

    cci
    i
    . Answer( C)iscor
    rect.Thepaybackperiodist
    henumberofyear
    srequi
    redtocomplet
    etheretur
    noftheor i
    ginalinv
    estment
    .Thepri
    ncipalpr
    oblemswiththe
    pay
    backmethodaret
    hati tdoesnotconsi
    derthet
    imeval
    ueofmoneyandtheinf
    lowsaf
    tert
    hepaybackper
    iod.Thei nf
    lowfort
    hefir
    sty
    earis$120,000,t
    hesecond
    CMAEXAMI NATI
    ONQUESTI ONS Page143of143
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    yeari
    s$60,000,andt hethi
    rdyearis$40,000,atotalof$220,000.Givenaniniti
    alinvestmentof$200,000,t
    hepay backper
    iodmustbebetween2and3y ears.Ift
    he
    cashinf
    lowsoccurev enlyt
    hroughoutthey ear
    ,$20,000($200,000-$120,000-$60, 000)ofcashinfl
    owsar eneededinyear3,whichi
    s50%oft hatyear
    'stot
    al.Thus,
    theansweri
    s2. 5years.
    Answer(A)isincorr
    ectbecause1.67year sassumest hattheinfl
    owsoft hefir
    styearcontinueatthesamer ateinthesecondyear.Answer(
    B)isincorr
    ectbecause
    $296,
    400willberecoveredaft
    er4.91years.Answer( D)isincorr
    ectbecauselessthan$180,000wi l
    lbepaidbackaf t
    er1.
    96years.

    cci
    i
    i. Answer( A)i
    scor r
    ect.TheNPVi sdefi
    nedast heexcessofthepresentval
    ueoft henetcashinf
    lowsoverthenetcostoftheinv
    est
    ment.Discount
    ingthefuture
    cashinf
    lowsbyt hepresentval
    uefact
    orsresult
    sinan$18,800NPV($218, 800–$200, 000)
    .
    Answer( B)isincorr
    ectbecause$218,800ist hepresentval
    ueoft hefuturenetcashi nfl
    ows. Answer(C)isincorr
    ectbecause$100,
    000istheexcessoft he
    undi
    scountedcashf l
    owsov ert
    heinvest
    ment .Answer(D)isi
    ncorr
    ectbecause$91,743i sbasedondiv
    idi
    ngthe$300,000tot
    ali
    nfl
    owsbythetot
    alofall
    presentvalue
    fact
    ors,
    whi chproducesanonsenseanswer.

    cci
    v. Answer( B)iscor rect.Thenetpr esentv alueistheexcessoft hepresentv aluesoft heest i
    mat ednetcashi nfl
    owsov erthenetcostoft hei nvestment( $160,
    000).
    Thef utur ecashi nfl
    owsconsi stof$85, 000pery earsav i
    ngsmi nusincomet axes.Gi v ensalvagev alueof$10, 000thedepr eci
    ati
    onbasei s$150,000( $160, 000cost-
    $10,000) .Thef ir
    standt hir
    dy ears’ depr ecationdeduct i
    onis$45, 000(30%x$150, 000)leaving$40, 000oft axableincome.Thus, f
    ir
    st-yearandt hir
    d-yeart axexpense
    i
    s$16, 000( 40%x$40, 000).Accor dingly ,t
    henetcashi nfl
    owi nbot hfi
    rstandt hir
    dy earsis$69, 000( $85,000–$16, 000).The$60, 000( 40%x$150, 000) depreci
    ati
    on
    deduct ionint hesecondy earresultsin$25, 000( $85,000-$60,000)oft axableincome.Secondy eartaxexpensei stherefore$10,000( $40,
    000x25%) , andt hesecond
    yearnetcashi nfl
    ow i s$75, 000( $85, 000-$10, 000).Thenetcashi nflow from t hesaleoft hemachi neis$10, 000.Not axispai dont hisamountbecauset he
    remai ningbookv al
    uei sal so$10, 000.Thepr esentv al
    ueoft hesenetcashi nf l
    owsi sdeterminedusi ngt heappr opr i
    atePVof$1f actorsf orahur dler ateof16%.
    Hence, thenetpr esentv aluei s$5,842( $165,842PV-$160, 000cost ).
    $69, 000x. 862 = $59, 478
    $75, 000x. 743 = 55,725
    $69, 000x. 641 = 44,229
    $10, 000x. 641 =
    6,410
    Presentv alue ofnetcash $165, 84
    i
    nf l
    ows 2
    Answer( A)isi ncorrectbecause$3, 278assumest hattaxesmustbepai dont hesal vagevalue.Answer( C)i
    si ncorrectbecause( $568)omi tssalvagev aluefrom t
    he
    calculation.Answer( D)i sincorrectbecause$30, 910equalsthepr esentvalueofa3- yearannuityof$85, 000di scount edat16%, minus$160, 000.

    ccv
    . Answer( C)iscor r
    ect.Thepaybackper i
    odi sthenumberofy earsr
    equiredforthecumulati
    veundi
    scountednetcashinf
    lowst oequalt heori
    ginalinv
    estment.The
    fut
    urenetcashinfl
    owsconsi stof$69, 000iny ear
    soneandt hree,
    $75,000inyeartwo, and$10,
    000uponresale.Af
    ter2years,t
    hecumul ati
    veundiscountednetcash
    i
    nfl
    owequals$144, 000.Thus,$16,000( $160,000-$144,000)istoberecoveredinthethir
    dyear,
    andpaybackshouldbecompl et
    einappr oximatel
    y2.23y ear
    s[2y ears
    +($16,
    000÷$69, 000netcashi nf
    lowint hi
    rdy ear)
    ].
    Answer(A)isincorrectbecause1.88assumesan$85, 000annualnetcashi nfl
    ow.Answer( B)isi
    ncor
    rectbecause3.00istheesti
    mat edusef ulli
    feofthemachi ne.
    Answer(D)isi
    ncorrectbecause1.62r esultsfrom addi
    ngincomet axexpensetot hecostsavi
    ngseachyear
    .

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page144of144
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ccv
    i. Answer( C)iscorrect.TheNPViscal cul
    atedbydiscountingtheaft
    er-
    taxcashflowsbythecostofcapit
    al.Thecashfl
    owsoft hi
    scompanyconst i
    tut
    eanannuit
    yof
    $100,000pery earplusaddi t
    ionalf
    lowsof$60, 000iny ear1and$40, 000inyear2.Thus,thepresentvalueofthesefl
    owsi s$418,600[(
    $100,
    000x3. 36PVofan
    annuityof$1f or5per iodsat15%)+( $60,
    000x. 87PVof$1f or1periodat15%)+( $40,
    000x. 76PVof$1f or2periodsat15%) ]
    .TheNPVi stheref
    ore$18,
    600
    ($418,600-$400,000).
    Answer( A)i
    sincorrectbecauseanegat iveNPVof$64, 000assumesnetcashf lowsof$100,000peryear.Answer(B)isincor
    rectbecauseanegati
    veNPVof$14,000
    resul
    tsf r
    om di
    scountingt henetear
    nings.Answer( D)isincorr
    ectbecause$200,000ist
    heundiscountedexcessofthecashfl
    owsov erthei
    nvest
    ment .

    ccv
    ii. Answer(B)i scorrect.Thepaybackmet hodcalculatesthenumberofy ear
    sr equi
    redtocompletethereturnoftheori
    ginali
    nvestment
    .Theini
    ti
    alcosti
    s$400,
    000,
    soWill
    iswill
    r ecoupit
    si nvest
    mentin3y ears($160,000i nyear1+$140,000inyear2+$100, 000i
    ny ear3)
    .
    Answer(A)isi ncor
    rectbecauseonl y$230,000woul dhav ebeenrecov
    eredafter1.5years.Answer(C)isincorr
    ectbecause$400,000wil
    lhav
    ebeenr ecov
    eredbyt
    he
    endof3y ears.Answer( D)isincor
    rectbecause4.00y earsisbasedonnetearningsrathert
    hancashf l
    ows.
    ccv
    ii
    i
    . Cashfl
    ows=($25,
    000x0.
    6)+(
    $50,
    000/
    4x0.
    4)=$20,
    000
    $50,
    000/
    $20,
    000=$2.50
    cci
    x
    .Cashfl
    ow=($25,
    000x0.
    6)+($50,
    000/
    4x0.
    4)=$20,
    000
    $20,
    000x3.
    037-$50,
    000=$10,
    740
    ccx
    .Cashf
    low=(
    $25,
    000x0.
    60)+[
    ($50,
    000/
    4)x0.
    40]=$20,
    000

    ccxi
    . Answer( C)i
    scorrect.TheNPVi scalculatedbydi scounti
    ngt heafter-
    taxcashf l
    owsf r
    om ani nvestmentbyt
    hecostofcapi
    tal:
    Year1 $320,000x. 87 $278, 400
    =
    Year2 280,000x. 76 212,800
    =
    Year3 200,000x. 66 132,000
    =
    Year4 200,000x. 57 114,000
    =
    Year5 200,000x. 50 100,000
    =
    Presentval
    ueofi nf
    lows $837, 200
    Subtr
    actingthe$800,000initi
    alcostfrom the$837, 200pr esentvalueoft hefutur
    einfl
    owspr oducesanNPVof$37, 200.
    Answer( A)i
    sincorr
    ectbecause$( 128,000)isbasedonadi scountingoft henetearni
    ngsr at
    hert hanoncashfl
    ows.Answer(B)isincorr
    ectbecause$200,
    000equals
    tot
    alundiscount
    ednetear ningsmi nust heinit
    iali
    nvestment .Answer( D)isincor
    rectbecause$400, 000equal
    stheundi
    scountedafter
    -t
    axcashf l
    owsminusthei
    niti
    al
    cost.

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page145of145
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ccxi
    i. Answer( C)iscorrect.Theprof
    it
    abili
    tyindexist hepresentvalueofthefuturenetcashfl
    owsdi vi
    dedbyt hepresentv al
    ueoft henetini
    ti
    alinvest
    ment.Thepresent
    valueoft hefuturenetcashf l
    owsi s$837, 200.Div i
    dingthe$800,000i ni
    ti
    alcostoftheinvestmentint othe$837, 200presentv alueofthef ut
    urenetcashinfl
    ows
    producesapr ofi
    tabi
    li
    tyindexofapproximately1.05.Anypr ofi
    tabil
    it
    yindexgreatert
    hanoneisconsideredaccept able.
    Answer( A)isincorr
    ectbecause0.05r esultsfrom usingtheNPVi nthenumer ator
    .Answer(B)isincorrectbecause0. 96reversest henumeratoranddenominatorof
    thecalcul
    ation.Answer( D)isi
    ncorrectbecause1. 25usesundi scountedearni
    ngsinthenumer at
    orinsteadoft hepr esentval
    ueoff utur
    enetcashf l
    ows.

    ccxi
    ii.Answer(B)iscorrect.Thepaybackmet hodissimplyt
    hetimer equir
    edtorecov ert
    heinvestment.Itdoesnotconsidert
    heti
    mev al
    ueofmoneyorreturnsaft
    erthe
    paybackperi
    od.Whencashf lowsarenotuniform,acumulat
    ivecalculati
    onisnecessary.Thus,3.
    0y earsisthepaybackperi
    od($320,
    000inthef
    ir
    sty
    ear ,
    $280,000in
    thesecondyear,and$200,000inthethir
    dy ear)
    .
    Answer(A)isincorr
    ectbecauseonl yalitt
    leoverhalfoft
    heiniti
    al$800,000investmentwouldhav ebeenr ecover
    edbyt heendof1.5year
    s.Answer(C)i si
    ncorr
    ect
    because$800,000willhavebeenrecoveredbyt heendof3years.Answer( D)isincorr
    ectbecause4.0y ear
    sisbasedonnetearnings.

    ccxi
    v .Answer( B)iscor rect
    .TheNPVmet hoddiscountst heexpect edcashf l
    owsf rom apr ojectusingt herequiredr ateofreturn.Apr ojectisaccept ableifit
    sNPVi s
    positi
    ve.Thef uturecashi nflowsconsi stof$170,000ofsav edexpensespery earmi nusi ncomet axesafterdeduct ingdepreciati
    on.I nthef irstyear,t
    heaf ter
    -t
    axcash
    i
    nf l
    owi s$170, 000mi nust axesof$32, 000{[$170,000-( 30%x$300, 000)depr eci
    at i
    on]x40%} ,or$138,000.Int hesecondy ear ,theaf t
    er -
    taxcashi nflowis$170,000
    minust axesof$20, 000{[$170,000-( 40%x$300, 000)depr eci ati
    on]x40%} ,or$150,000.I nt het hi
    rdyear,theaf ter-
    taxcashinf l
    ow( excludingsal v
    agev alue)isagai
    n
    $138,000.Al soi nthethir
    dy ear,theaf t
    er-
    taxcashi nf
    lowf rom t hesal vagevalueis$12, 000[ $20,000x( 1.
    0-. 40)].Accordi
    ngly ,thetotalf ort hethi
    rdyeari s$150,
    000
    ($138,000+$12, 000).Thesum oft hesecashflowsdiscount edusi ngthefactorsfort hepr esentv alueof$1atar ateof16%i s$326, 556.
    $138,000x. 862= $118, 95
    6
    $150,000x. 743= 111, 450
    $150,000x. 641=
    96,150
    Discounted cash $326, 55
    i
    nflows 6
    Thus, theNPVi s$26,556( $326,556-$300,000i ni
    ti
    aloutflow) .
    Answer( A)isincorrectbecause$31, 684doesnotconsi dert heincomet axesont hesal vagev al
    ue.Theassetwasf ul
    l
    ydepr eciated,soanysal esreceiptswouldbe
    taxablei ncome.Answer( C)isincorrectbecause$94, 640doesnotconsi derincomet axes.Answer( D)isi ncorrectbecause$18, 864doesnotconsi dert hesalv
    age
    value.

    ccxv. Answer( A)iscorrect.Theprof


    it
    abil
    it
    yindexisthepr esentvalueoft hefuturenetcashi nfl
    owsdivi
    dedbyt hepresentv alueofthenetinit
    iali
    nvestment.The
    presentval
    ueoft hefutur
    enetcashinfl
    owsis$326,556.Hence,theprofi
    tabil
    it
    yindexi s1.
    089($326,556÷$300,
    000).
    Answer( B)i
    si ncorr
    ectbecause1.106doesnotconsi dertheincomet axesont hesalvagevalue.Theassetwasfull
    ydepr eciated,soanysalesreceipt
    swouldbe
    taxabl
    eincome.Answer( C)isi
    ncorr
    ectbecause1.315ignoresallcashflowsf orincometaxes.Answer(D)isi
    ncorr
    ectbecause1. 063doesnotconsiderthesal
    vage
    value.

    ccxv
    i.Answer(C)i
    scorr
    ect
    .Thepay
    backper
    iodi
    sthet
    imer
    equi
    redt
    orecov
    ert
    heor
    igi
    nali
    nvest
    ment
    .Theannualnetaf
    ter
    -t
    axcashi
    nfl
    owsf
    ory
    ear
    s1t hr
    ough3are
    CMAEXAMI NATIONQUESTI
    ONS Page146of146
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    $138,000,$150,000,and$150,000,r
    especti
    vel
    y.Aft
    er2y ears,$288,000($138,
    000+$150,000)wi l
    lhavebeenr ecov
    ered.Consequentl
    y,t
    hefir
    st$12,000recei
    vedin
    year3wi l
    lrecouptheinit
    iali
    nvest
    ment.Because$12,000represents.08ofthethi
    rdyear
    'snetaft
    er-taxcashinf
    lows($12,000÷$150,000)
    ,thepaybackperi
    odis2.08
    years.
    Answer( A)isincorrectbecause2.84yearsdoesnotconsi derdepr eci
    ati
    on.Answer(B)isincorrectbecause1.76y earsdoesnotconsidertaxes.Answer(D)is
    i
    ncor r
    ectbecause3.00y earsi
    stheti
    mer equi
    redtodepreci
    atetheassetf ul
    ly
    ,nott
    hepaybackperiod.

    ccxvi
    i.Answer( D)iscor rect
    .Thepay backper iodistheti
    mer equiredtor ecovertheor i
    ginalinvest
    ment .Theannualnetaft
    er-
    taxcashi nf
    lowsforyears1through3ar e
    $138,000,$150,000,and$138, 000( excludingsalvagevalue),respectivel
    y.After2y ears,$288,000( $138,
    000+$150,000)wil
    lhav ebeenrecover
    ed.Consequentl
    y,the
    fi
    rst$12,000receivedi nyear3wi llrecoupt hei
    niti
    ali
    nvest ment .Because$12, 000repr esents.09( r
    ounded)oft
    het hi
    rdyear'
    snetaf t
    er-
    taxcashinfl
    ows( $12,
    000÷
    $138,000),t
    hepay backper i
    odi s2.09y ears.
    Answer( A)isincorrectbecause2. 84y earsi ncl
    udessalvagev al
    ueanddoesnotconsi derdepreciati
    on.Answer(B)i
    sincorrectbecause1.76yearsincl
    udessalvage
    valueanddoesnotconsi dertaxes.Answer( C)isincor
    rectbecause2. 08yearsincludessal vagevalue.
    ccxv
    ii
    i
    . Pay
    backper
    iod=$4,
    500,
    000/
    $750,
    000=6.
    0year
    s
    ccxi
    x
    . 5.
    650x$750,
    000-$4,
    500,
    000=$(
    262,
    500)
    ccxx
    .
    $4,
    500,
    000/
    $750,
    000=6.
    000,
    whi
    chi
    sthepvf
    act
    orf
    orn=10,
    andIgr
    eat
    ert
    han10per
    cent
    ,butl
    esst
    han12per
    cent
    .

    ccxxi.REQUI RED:ThecostofPr ojectAgi ventheI


    RR.
    DISCUSSION:( B)theIRRist hedi scountrat
    ethatsetsthenetpresentvalueoft heproj
    ectequaltozero,
    tothepresentvalueofthecostsequalst
    hepr esentv al
    ueof
    thecostsequalsthepresentv alueoft hecashinf
    lows.AtanI RRof15%, thepresentval
    ueoft heinf
    lows(andther
    eforethepresentval
    ueoft hecosts)forProjectA
    equalstheconstantannualinflowt imesthepresentv alueofanordinaryannuityof$1f orthr
    eeperiodsat15%.Thus,t hecostofProjectAis$22,832( $10,000x
    2.2832).
    Answer( A)isi
    ncorr
    ectbecause$8, 696usesthepr esentval
    ueint
    erestfactorf
    oroneper i
    odat15%.Answer( C)isi
    ncorrectbecause$24,869i
    sobtainedusi nga10%
    discountrat
    e.Answer(D)isincor rectbecause$27,232isbasedona5%di scountr at
    e.

    ccxxii.REQUI RED:TheNPVofPr oj
    ectBgiv ent hedi
    scountrate.
    DI SCUSSI ON:(A)TheNPVi st hepresentv alueofthecashi nflowsmi nusthecostoftheproj
    ect.Theinfl
    owsforthi
    sproj
    ectar
    enotconst
    ant,sotheindi
    vidualcash
    flowsmaybedi scountedusingthei nt
    er estfact
    orsf orthepr esentvalueof$1dueatt heendofaper i
    oddiscount
    edat10%.Thesum oft hesepresentvaluesis
    $24, 079[($5,
    000x. 9091)+($10,000x. 8264)+( $15,000x. 7513)].Hence, t
    heNPVis$4,079($24,079–$20,000cost
    ).
    Answer( B)isi
    ncorrectbecause$6,789usesa5%di scountr at
    e.Answer( C)isi
    ncor
    rectbecause$9,869i
    stheNPVofPr oj
    ectAata10%discountr
    ate.Answer( D)is
    incor r
    ectbecause$39,204usespr esentv alueint
    erestfactorsforannuities.

    ccxxii
    i
    .REQUIRED:Thepaybackperi
    odforPr
    ojectC.
    DISCUSSION(C)Thepaybackperiodi
    sthetimenecessar
    ytor
    ecoupt
    hei
    nvest
    ment
    .Af
    ter2y
    ear
    s,t
    hecumul
    ati
    vecashi
    nfl
    owsf
    orPr
    ojectCar
    eexact
    lyequalt
    othe
    ini
    ti
    ali
    nvest
    mentoutl
    ayof$25,000.
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page147of147
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer(A)i
    sincorr
    ectbecausethepaybackperi
    odwoul dbezeroonlyi
    faproj
    ecthadnocostorpr
    ovidedimmedi
    atecashinfl
    owsatl
    eastequaltothei
    nvest
    ment
    out
    lay
    .Answer( B)i
    sincor
    rectbecauseaft
    er1year,t
    hecumulati
    vecashi
    nfl
    owsforProj
    ectCar
    eonly$15,000.t
    hei
    nit
    ial
    invest
    mentout
    layi
    s$25,000.Answer(D)i
    s
    i
    ncorr
    ectbecauseProj
    ectCpaysbacki t
    sini
    ti
    ali
    nvestmentout
    layi
    nonly2year
    s.

    ccxxi
    v.REQUI RED:They ear2cashi nfl
    owf orProj
    ectD.
    DISCUSSI ON:( C)t hediscountedpay backperi
    odi sthet i
    merequi redfordiscountedcashf l
    owstorecov
    erthecostoft hei
    nvestment.Thus,t
    hecostofProj
    ectD
    mustequalt hepr esentvalueoft heend-of-
    year
    -1cashi nfl
    owdi scountedat5%pl ust hepresentv
    alueoft
    heend-of-
    year-
    2cashi nf
    low.Theyear2cashinfl
    ow(x)i
    s
    calculat
    edasf oll
    ows:
    $30,
    000=( $20,000x. 9524)+( Xx.9070)
    X=( 430,000-$19, 048) . 9070
    X=$12, 075
    Answer( A)isincorrectbecause$5, 890usespr esentvalueint
    er estfact
    orsforannui t
    ies.Answer(B)i
    sincor
    rectbecause$10,000isbasedontheregul
    arpay
    back
    period.Answer( D)isincorrectbecause$14,301isobtainedusinga10%di scountrate.

    ccxxv.Answer( C)i scorr


    ect.TheNPVofPr oj
    ectAequalsthepr esentval
    ueofthecashinfl
    owsminusthei nvest
    ment'scost.Thepresentvalueofthecashinfl
    owsequals
    thepresentv aluefactorf
    oranordinaryannuit
    y(fi
    veperiodsatt he10%costofcapital
    )ti
    mestheper i
    odicamount.GiventhattheNPVi s$12,405,thepresentval
    ueof
    thecashi nf
    lowsmustbe$112, 405($100,000cost+$12, 405).Thus,t
    heend-of-
    peri
    odamountmustbe$29, 652($112,405÷3.7908).
    Answer( A)isi ncor
    rectbecause$19,979result
    siftheinvestmentcostisomi t
    tedfr
    om thecal
    culat
    ionandt hePVIFisused.Answer( B)i si
    ncorr
    ectbecause$21,863
    resul
    tsifthei nvestmentcostisomittedfrom t
    hecalculati
    on,a12%di scountrat
    eisused,andthePVI Fisused.Answer( D)i
    si ncor
    rectbecause$31,182result
    sifa
    12%di scountr atei
    sused.

    ccxxvi.Answer(C)iscorrect.TheNPVofPr ojectBequal st
    hepr esentvalueofthecashinflowsmi nustheinv
    estmentcost
    .Thepresentval
    ueoft hecashinfl
    owsequals
    thePVI FAfortwoper iodsatthe12%di scountrateti
    mest heper i
    odicamount.Thepr esentvalueofthecashinf
    lowsmustbe$67, 604($40,000x1.6901).Thus,t
    he
    NPVmustbe$17, 604( $67,
    604-$50,000i nvest
    mentcost).
    Answer( A)isi
    ncorrectbecause( $18,
    112)r esult
    sifthePVIFf or12%andt woperiodsisused.Answer( B)isi
    ncorr
    ectbecause(
    $16,944)result
    sift
    hePVIFanda10%
    discountrat
    eareused.Answer( D)isincorrectbecause$19,420resultsifa10%discountrateisused.

    ccxxvi
    i.
    Answer( B)i scor r
    ect.TheIRR( 12%)i sthediscountratet hatset stheNPVequalt ozero.Thus,theNPVofPr oj
    ectCwi llequalzer owhent heinvestmentcost
    equalsthepr esentv al
    ueoft hecashi nflows.Giv
    ent hattheinv estmentcosti s$60,000,thesum ofthepresentval
    uesoft hecashi nfl
    owsmustal soequal$60,000.
    Thepr esentvalueoft hecashi nflowatt heendofy ear1i s$17, 858($20,000x. 8929PVI Fforoneperiodat12%).Thepr esentv alueoft hecashinfl
    owatt heendof
    year2i s$27,902( $35,000x. 7972PVI Ffortwoper i
    odsat12%) .Accordi
    ngly,thepresentvalueofthecashinfl
    owatt heendofy ear3mustbe$14, 240($60,
    000-
    $17,858-$27, 902)
    ,andt heundi scountedcashinfl
    owmustbe$20, 006($14,240÷. 7118PVIFforthr
    eeper i
    odsat12%).
    Answer( A)isincorrectbecause$17, 162r esul
    tsi
    fa10%I RRi sused.Answer( C)isincorr
    ectbecause$24,126resul
    tsifthepr ojectcashi nf
    lowsaretreatedasalevel
    annuityanda10%di scountrateisused.Answer( D)isincorrectbecause$24, 981result
    siftheproj
    ectcashinfl
    owsar etreatedasal ev
    elannuit
    yanda12%di scount
    rat
    ei sused.

    ccxxv
    ii
    i. Answer(
    B)i
    scor
    rect
    .Af
    ter2y
    ear
    s,t
    hecumul
    ati
    vecashi
    nfl
    owsf
    orPr
    ojectBequal
    $80,
    000.Consequent
    ly,
    thei
    nvest
    mentout
    layof$50,
    000hasbeenf
    ull
    y
    CMAEXAMINATIONQUESTI
    ONS Page148of148
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    recovered.
    Answer( A)isincor
    rectbecause,aft
    er1y ear
    ,Proj
    ectBhashada$50,
    000outf
    lowbutonly$40,000ofi
    nfl
    ows,sotheinv
    estmentoutlayhasnotbeenful
    l
    yrecover
    ed.
    Answer( C)isincor
    rectbecausetheinvestmentoutl
    ayf
    orPr
    ojectCwi
    l
    lnotberecov
    eredunti
    lthethi
    rdy
    ear.Answer(
    D)isincor
    rectbecauset
    heinvest
    mentoutl
    ayfor
    ProjectCwillnotberecoveredunti
    lthethi
    rdyear.

    ccxxi
    x.Answer(C)iscorrect.Thepaybackperi
    odisthetimer equi
    redt orecovertheinit
    ialcashoutl
    ay.ThecostofAis$700,000,andthecumul
    ati
    vecashi
    nfl
    owatt he
    endofthesecondy earis$700,
    000($400,000+$300,000).
    Answer(A)i
    si ncor
    rectbecauseapay backperi
    odcannotbe0y ear sunlesstheprojectiscostfr
    ee.Answer(B)isi
    ncor
    rectbecauseonl
    y$400,
    000hasbeenrecouped
    aft
    eroneyear.Answer( D)isi
    ncor
    rectbecausethei
    niti
    alcashoutlayisexpectedtober ecov
    eredaft
    ertwoyears.

    ccxxx.Answer( A)iscorr
    ect .Thenetpresentv alueofPr oj
    ectAi scalculat
    edbysubtracti
    ngthei ni
    ti
    alcashinvestmentfrom t
    hepr esentval
    ueoft heexpectedcash
    inf
    lows.Itequal
    s$362,340[ (
    $400,
    000x. 9091)+( $300,000x.8264)+( $600,
    000x.7513)-$700,000].
    Answer( B)isi
    ncorr
    ectbecause$1,062,340r esult
    sfrom notsubtracti
    ngtheini
    ti
    ali
    nvestment.Answer(C)isincorr
    ectbecause$1,676,
    670iscalcul
    atedusi
    ngpr esent
    val
    uefact or
    sforannui
    ties.Answer(D)isincorrectbecause$2,376,670iscal
    cul
    atedusingpresentval
    uefactorsforannui
    ti
    eswithoutsubtr
    act
    ingtheini
    ti
    alinv
    estment
    of$700,000.

    ccxxxi
    .Answer( C)i
    scorrect.Theapproxi
    mat einternalrateofr etur
    nisdef i
    nedasthediscountr
    ateatwhichthenetpresentval
    uei szer
    o.Usi
    ngadi scountrat
    eof24%,
    thenetpresentval
    ueofPr oj
    ectBis-$4,675[(1.9813x$250, 000)-$500, 000].
    Answer( A)i
    sincor
    rectbecause,atadiscountr ateof16%, thenetpr esentval
    ueofProj
    ectBis$61,
    475.Answer( B)i
    sincor
    rectbecause,
    atadiscountrat
    eof20%,the
    netpresentval
    ueofPr oj
    ectBis$26,625.Answer( D)isincorrectbecause,atadi
    scountrat
    eof28%,thenetpresentval
    ueofProjectBis-
    $32,
    900.

    ccxxxi
    i. Answer( A)iscorrect.Wheni nvestmentpr oj
    ect sarei ndependent,thecashflowsar eunrel
    ated.Thecompanymaychooseanyoral lofthem,subj
    ectt o
    capitalavai
    labil
    ity.Proj
    ectswi thposi
    ti
    venetpr esentvalueswi llbechosen.Pr ojectAhasanetpr esentvalueof$362,340[(
    $400,
    000x. 9091)+($300,000x.8264)+
    ($600,000x. 7513)-$700, 000].Thenetpr esentvalueofPr ojectBi s$121,825[(2.4873x$250,000)-$500,000].
    Answer( B)isi ncorrectbecausebot hprojectshav eposi t
    ivenetpr esentv al
    uesandar etherefor
    eundertakenbyt hecompany.Answer(C)isincorr
    ectbecausebot h
    projectshaveposi ti
    venetpr esentval
    uesandar ethereforeunder t
    akenbyt hecompany .Answer(D)isi ncorr
    ectbecausebothproj
    ectshaveposi t
    ivenetpresent
    valuesandar et herefor
    eunder takenbythecompany .

    ccxxxi
    i
    i. Answer(C)i
    scorrect
    .Thecashi nf
    lowoccur s5y earsafterthecashoutf
    low,andtheNPVmet hodusesthefir
    m'scostofcapi
    talof18%.Thepr esentval
    ue
    of$1dueattheendof5yearsdiscountedat18%i s.4371.Thus,theNPVofpr oj
    ectAi s$(265,
    460)[
    (.
    4371x$7,400,
    000cashinfl
    ow)-$3,
    500,000cashout fl
    ow].
    Answer(A)i
    sincorr
    ectbecause$316, 920discountst hecashi nfl
    ow ov era4-
    yearperi
    od.Answer(B)isincorr
    ectbecause$23,
    140assumesa16%di scountrate.
    Answer(D)i
    sincorr
    ectbecause$( 316,920)discountsthecashi nflow overa4-y
    earperiodandalsosubtract
    sthepresentval
    ueofthecashi nf
    low f
    rom t hecash
    outf
    low.

    ccxxxi
    v. Answer(D)iscorr
    ect.Theinter
    nalrateofretur
    nisthediscountrateatwhichtheNPViszer
    o.Consequent
    ly,
    thecashout
    fl
    owequalsthepresentval
    ueof
    theinf
    lowattheinter
    nalrat
    eofr et
    urn.Thepr esentval
    ueof$1f act
    orf orpr
    ojectB'
    sinter
    nalr
    ateofr
    etur
    nisther
    efor
    e.4020($4,
    000,
    000cashoutf
    low÷$9, 950,
    000
    cashinfl
    ow).Thi
    sfactori
    sclosesttothepresentvalueof$1for5periodsat20%.
    CMAEXAMI NATIONQUESTI ONS Page149of149
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer(A)isi
    ncorr
    ectbecause15%resul
    tsi
    naposit
    iveNPVforproj
    ectB.Answer(
    B)i
    sincor
    rectbecause16%i
    stheappr
    oxi
    mat
    eint
    ernalr
    ateofr
    etur
    nforpr
    oject
    A.Answer(C)i
    sincorr
    ectbecause18%ist
    hecompany'
    scostofcapi
    tal
    .

    ccxxxv. REQUI RED:Thenetpr esentvalueofeachpr oj


    ect.
    DISCUSSI ON:( B)TheNPVi st heexcessoft hepr esentval
    ueofestimatedcashi nfl
    owsov ert
    henetcostoft heinvest
    ment.Atazer ocostofcapi t
    altheNPVi s
    simplyt hesum ofapr oj
    ect’
    sundi scountedcashf l
    ows.Thus, theNPVofPr ojectAis$50,000($40,
    000+$40,000–$30, 000),andtheNPVofPr ojectBis$200,000
    ($700,000+$500, 000–$1,000,000) .
    Answer( A)isincorrectbecause$30, 000and$1, 000,000aretheini
    ti
    ali
    nv est
    mentout laysforAandB,respectiv
    ely.Answer( C)isi
    ncor
    rectbecause$80,000and
    $1,200,000ar ethecashi nfl
    owsf orAandB,r especti
    vel
    y.Answer( D)isincorrectbecause$110,
    000forProjectAand$2, 200,000f
    orProjectBar ecal
    culat
    edby
    addingt heini
    ti
    al outl
    aystothesum oft hecashi nfl
    ows.

    ccxxxvi. REQUIRED:Thei nt
    ernal
    rateofretur
    nf orPr
    ojectA.
    DISCUSSION:( D)Theinternalr
    ateofret
    urnisthediscountrat
    ethatset
    saproj
    ect’
    sNPVequal
    tozer
    o.Thei
    nter
    nal
    rat
    eofr
    etur
    nmaybedet
    ermi
    nedasf
    oll fI
    owsi RR
    istheint
    ernal
    rateofreturn,ti
    stherimeperiod,andnisthenumberoftimeper
    iods:

    Subst
    it
    uti
    ngi
    nthef
    oregoi
    ngexpr
    essi
    ony
    iel
    dsani
    nter
    nal
    rat
    eofr
    etur
    nof100%.

    I
    RR=100%
    Answer(
    A)i
    sincor
    rectbecauseapplyi
    ngadiscountrat
    eof10%result
    sinaNPVof$69,421.Answer(
    B)i
    sincor
    rectbecauseappl
    yi
    ngadi
    scountr
    ateof15%r
    esul
    ts
    i
    naNPVof$65,028.Answer( C)i
    sincorr
    ectbecauseappl
    yi
    ngadiscountr
    ateof25%r
    esult
    sinaNPVof$57,
    600.

    ccxxxvi
    i. REQUI RED:Thedi f
    fer
    encebetweenthenetpresentv alue(NPV)andi nt
    ernalrat
    eofr eturn(I
    RR)
    DISCUSSION:( A)NPVassumest hatcashinfl
    owsf r
    om theinv estmentpr ojectcanber ei
    nvest edatthecostofcapi tal,whereasIRRassumest hatcashflowsfr
    om
    eachprojectcanber ei
    nvest edattheIRRforthatparti
    cul
    arpr oject.Thisunder ly
    ingassumpt ioni sconsi
    deredt obeaweaknessoft heIRRt echni
    que.Thecostof
    capit
    ali
    st heappr opr i
    atereinvestmentrat
    ebecauseitrepresentst heoppor tuni
    tycostforapr ojectatagivenlevelofrisk.Thepr obl
    em withtheIRRmet hodisthati
    t
    assumesahi gherdiscountr ateeventhoughapr oj
    ectmaynothav eagr eaterlevelofri
    sk.
    Answer( B)isi ncorrectbecauseNPVandI RRmakeconsi st
    entaccept /
    rejectdecisi
    onsf orindependentprojects.WhenNPVi sposit
    ive,I
    RRexceedst hecostof
    capit
    alandt hepr ojectisaccept abl
    e.Answer( C)isincorr
    ectbecauset heNPVmet hodcanbeusedt orankmut ual
    lyexclusiveproj
    ects,whereasIRRcannot.The
    rei
    nvest
    mentr ateassumpt i
    oncausesI RRt omakef ault
    ypr ojectr anki
    ngsundersomeci rcumst ances. Answer( D)i sincorr
    ectbecauseI RRi sexpressedasa
    percent
    ageandNPVi ndollarterms.
    ccxxxv
    ii
    i
    .Calcul
    atetheafter
    -t
    axcomponentcostofdebtas10%(1-0.
    3)=7%.I
    fthecompanyhasearni
    ngsof$100,
    000andpaysout50%or$50,000i
    ndivi
    dends,t
    henit
    wi
    llr
    etai
    nearningsof$50,
    000.Ther
    etai
    nedearningsbr
    eakpoi
    nti
    s$50,
    000/0.
    4=$125,000.Si
    ncei
    twil
    lrequi
    ref
    inanci
    ngi
    nexcessof$125,
    000toundert
    akeanyof
    CMAEXAMINATIONQUESTI ONS Page150of150
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    thealt
    ernat
    ives,
    wecanconcl udethef
    ir
    m mustissuenewequit
    y.Therefor
    e,t
    hepert
    inentcomponentcostofequi
    tyi
    sthecostofnewequit
    y.Cal
    cul
    atetheexpect
    ed
    divi
    dendpershare(not
    ethisisD1)as$50,
    000/10,
    000=$5.Thus,thecostofnewequityi
    s$5/[(
    $35(1-0.12)
    ]+6%=22. 23%.Jackson’
    sWACCis7%(0.
    6)+
    22.23%(0.
    4)=13.09%.Onlytheret
    urnonProj
    ectAexceedstheWACC, soonl
    yProj
    ectAwi l
    lbeundert
    aken.
    ccxxxi
    x
    . Thesi zeofGi bson’scapital budgetwi l
    lbedet er
    mi nedbyt henumberofpr ojectsitcanpr ofi
    tablyundertake,thatis,thoseprojectsforwhichIRR>appl i
    cable
    WACC.Fi r
    st,f
    indt hecostsofeacht ypeoff i
    nancing:costofretainedear ni
    ngs=ks=$4/ $42+0. 06=15. 52%andcostofdebt=kd=11%.Tocal culatet
    hecostofnew
    equity,kewesolvef orke=$4/ ( $42- $2)+0. 06=0. 16=16%.Gi vent hefirm’stargetcapi t
    al str
    uctureandi t
    sr etai
    nedear ni
    ngsbalanceof$600, 000,thefi
    rm canrai
    se
    $1,000,000withdebtandr etainedear ningsbef or
    eitmustuseout sideequi t
    y.Ther ef
    or e,theWACCf or0-$1, 000,
    000off i
    nancing=0. 4(0.
    11)(1-0.4)+0.6(
    0.1552)=
    11.95%.Abov e$1, 000,
    000, t
    hef i
    rm musti ssuesomenewequi t
    y,sot heWACC=0. 4(0.11) (
    1-0.4)+0. 6(0.
    16)=12. 24%.Obv iousl
    y ,Proj
    ectsAandBwi l
    lbe
    undertaken.Youmustt hendet er minewhet herProjectCwi l
    lbepr ofi
    table.Sincei ntakingAandBwewi llneedf inancingof$800, 000,t
    he$400, 000neededf or
    ProjectCwoul dinv ol
    vef i
    nancing$200, 000wi t
    hdebtandr et
    ainedear ningsand$200, 000wi t
    hdebtandnewequi ty.Thus, t
    heWACCf orProj
    ectCi s
    ($200,000/$400,000) 0. 1195+( $200,000/ $400,
    000) 0. 1224=12. 095%whi chi sgreatert hanPr oj
    ectC’sIRR.Cl early
    , onl
    yProjectsAandBshoul dbeaccept ed,
    and
    thefirm’scapit
    al budgetis$800, 000.
    ccxl
    .
    Calculatether etai
    nedearningsbreakpoint(BPRE)as$300,000/0.6=$500,000.CalculateksasD1/ P0+g=$2( 1.06)
    /$30+6%=13. 07%.Cal cul
    atekeasD1/ (P0-F)+g
    =$2( 1.06)/($30-$5)+6%=14. 48%.FindWACCbel owBPREas: WACC=0. 6(13.07%)+0. 4(9%) (
    1-0. 35)=10.18%.Thus,upt o$500,000canbef i
    nancedat10. 18%.
    FindWACCabov eBPREas: WACC=0. 6(14.48%)+0.4(9%)(1-0.35)=11.03%.Thus, financinginexcessof$500, 000costs11.03%.Project
    s2, 3,and4al lhaveIRRs
    exceedi ngeitherWACCandshoul dbeaccept ed.Theseproject
    sr equi
    re$450,000inf inancing.Project1isthenextmostpr ofit
    ableproj
    ect.Givenitscostof$100,000,
    halfor$50, 000canbef i
    nancedat10. 18%andt heotherhalfmustbef i
    nancedat11. 03%.Ther elevantcostofcapital
    forProject1isthen0. 5(
    10.18%)+0. 5(11.
    03%)=
    10.61%.Si ncePr oj
    ect1’
    sI RRislessthanthecostofcapi t
    al,i
    tshouldnotbeaccept ed.Thef i
    rm’sopt i
    mal capit
    albudgetis$450,000.
    ccxl
    i
    .
    Step1:
    Cal
    cul
    atet
    heretai
    nedearni
    ngsbreakpoi
    nt:
    BPRE=Ret
    ainedearni
    ngs/wc=($500,
    0000.
    6)/
    0.6=$500,
    000.

    St
    ep2:
    Cal
    cul
    atet
    heWACCs:
    (Ther
    ewillbetwo:
    onewi
    thr
    etai
    nedear
    ningsandonewi
    thnewequi
    ty.
    )
    WACC1=[0.
    48%( 1-0.
    4)]+[0.
    612%]=9.
    12%.
    WACC2=[0.
    48%( 1-0.
    4)]+[0.
    613%]=9.
    72%.

    St
    ep3:
    Determinet heoptimalcapitalbudget:
    Now, wor kthroughthepr oj
    ect s,
    starti
    ngwi t
    hthehighest
    -r
    etur
    nprojectfir
    st,todeter
    minethefi
    rm’sopt i
    malcapitalbudget.I
    nit
    ial
    l
    y,theWACCi s9.12percent
    forthefirst$500,000ofpr ojects,providi
    ngtheyretur
    nmor ethan9. 12percent.Onthebasisofthis,wewi l
    ltakePr oj
    ectsA,B,andC,f oratot
    albudgetof
    $400,000.Pr oj
    ectDwi llbef undedhalfbyWACC1 andhal fbyWACC2;howev er,si
    nceProj
    ectDr et
    ur ns9.85percent,weshouldstil
    laccepti
    tbecausethisis
    greaterthanWACC2.Pr oj
    ectEr et
    urns9. 25per
    cent,butitwi
    llbef undedent i
    rel
    youtofWACC2 f undsat9. 72per cent
    ,sowewoul dnotacceptProj
    ectE.
    Therefore,Project
    sA,B, C,andDshoul dbeacceptedandthetotal
    capi t
    albudgetis$600,
    000.

    ccxl
    ii
    .REQUI RED:Thechar
    act
    eri
    sti
    csofpr
    oject
    sonanI OS.
    DISCUSSION:(D)AnIOSschedul
    eisdr
    awnf orasetofi
    ndependentpr
    oject
    s.Thedeci
    siont
    obemadei
    swhet
    hert
    oacceptorr
    ejecteachpr
    ojectwi
    thoutr
    egar
    dto
    CMAEXAMI NATIONQUESTI
    ONS Page151of151
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    otherinvestmentopportuni
    ti
    es.Thus,thecashflowsofonei ndependentpr oj
    ectar enotinf
    luencedbyt hoseofanother.Independenceshoul
    ddist
    inguishedf r
    om
    mut ualexcl
    usivi
    ty.Proj
    ectsaremutual
    l
    yexclusi
    veifacceptanceofoner equiresrejecti
    onoftheot her
    .
    Answer( A)isincorr
    ectbecauseIOSschedul
    esdonotr equi
    rethatallprojectshavet hesamei nvestmentcost.Thest epsoft heschedul
    ecanbeofv aryi
    ngl engt
    hs.
    Answer( B)isincorr
    ectbecauseI
    OSschedulescannotbedr awnf ormutual l
    yexclusiveproj
    ect
    s.Answer( C)isincor
    rectbecauseIOSschedulesdonotrequirethatal
    l
    proj
    ectshav ethesameNPV.TheNPVofeachpr ojectdependsont hei nvestmentcostandont hepr esentvalueoftheexpectedcashflows.Bothcostsandcash
    fl
    owscanv aryforproj
    ectsonanIOS.

    ccxl
    ii
    i.REQUI RED:Thepr oject
    (s)inwhi cht hecompanyshoul dinv estandi tsopti
    mal capi tal
    budget .
    DISCUSSI ON:( B)Theintersectionoft heI OSandMCCschedul esdeter minest hecostofcapi talandt heopt
    imalcapitalbudget.Thecompanyshouldbegi nwi
    ththe
    projecthav i
    ngt hehighestreturnandcont inueacceptingpr ojectsasl ongast heI RRexceedst heMCC.Thehi ghestrankprojecti
    sA,witha$50mi ll
    i
    oncostanda
    14%I RR.TheMCCi sonly6%ov ert hi
    sr angeoffinancing.Thenexthi ghestrankedpr oj
    ecti sB, witha$75mi l
    lioncostanda12%I RR.When$125mi lli
    onhasbeen
    i
    nv ested,themar gi
    nalcostoft henextdol l
    arofcapitalis10%,soPr ojectBi sal soaccept able,bri
    ngingtheoptimalcapi t
    albudgetto$125mil
    li
    on.Pr ojectCisnot
    accept ablebecauseithasan8%r eturn.TheMCCi s10%f orthef i
    rst$50mi l
    li
    oni nv estedint hi
    spr ojectand12%f ortheremaining$75mil
    li
    on.
    Answer( A)isincor
    rectbecausebot hAandBshoul dbeunder taken.Answer( C)i si ncorrectbecauseAi sacceptabl
    e,butCi snot.Answer(D)i
    sincorr
    ectbecauseC
    i
    snotaccept able.I
    tof f
    ersanI RRl esst hanthemar gi
    nal costoff i
    nanci ngthispr oject.

    ccxl
    iv.REQUI RED:Themar ginalcostofcapit
    alandtheappr
    opriatediscountrate.
    DISCUSSI ON:(C)Theappr opri
    atediscountrat
    e(thecostofcapi talusedi ncapit
    albudget ing)t heor
    eticall
    yisdeterminedatt heintersect
    ionoftheIOSandMCC
    schedules.Thisi
    nter
    sectionisatanMCCof10%andanopt i
    malcapi tal
    budgetof$125mi l
    li
    on.Howev er
    , i
    ftheopti
    malcapi talbudgetisassumedt obe$150mill
    i
    on,
    thecompanyi ssti
    l
    linthesecondi nter
    valoftheMCCschedul e.Themar ginalcostoff i
    nancingi nthispartoftheschedul ei
    s10%.
    Answer( A)isi
    ncorr
    ectbecause6%appl i
    esonlytothefi
    rst$75mi ll
    ionofnewf inancing.Gi vent hattheopt i
    malcapitalbudgetexceeds$75mi l
    li
    on,6%cannotbethe
    discountrat
    e.Answer( B)isi
    ncorrectbecause8%istheIRRofPr ojectC.Answer( D)i sincorrectbecause, ataninv
    est mentlevelof$150mi ll
    i
    on,theMCCis10%.

    ccxl
    v .REQUI RED:Ther easonfortheincr
    easesintheMCC.
    DISCUSSI ON:( D)TheMCCi saweightedaverageofthecostsofthedif
    fer
    entf inanci
    ngsour ces.Ifthecostofanysourceoffi
    nanci
    ngincreases,
    theMCCcur vewil
    l
    ri
    se.TheMCCcur v
    ei supwar dsl
    opingbecausethelowestcostfi
    nanci
    ngsour cesar eassumedt obeusedf ir
    st.Thus,ascumulat
    ivedebti
    ncreases,
    thecostofdebt
    alsoincreases.
    Answer s(A)and( B)ar eincorr
    ectbecausefi
    nancingcostsdonotdependonr atesofreturnoni nvestment
    .Answer( C)isi
    ncorr
    ectbecause,asaddit
    ionalf
    undsare
    raised,anincreaseinthecostofasour ceoffi
    nancing,notadecr
    ease,wil
    lresultinanincreaseintheMCC.

    ccxl
    vi.REQUIRED:TheNPVoft henewmachi ne.
    DISCUSSION:( C)The#300, 000ofannualsav ingsdiscountedat12%hasapr esentval
    ueof$1, 083,
    000($300,000x3.61PVofanor dinaryannuit
    yforfiv
    eperiodsat
    12%).Thenetcostoft henewmachi neisthe$1,000,
    000pur chasepricemi nusthe$60,000cashi nfl
    owfrom thesaleoftheoldmachine,or$940,000.Theresulti
    ng
    NPVi s$143,000( $1,083,000presentv al
    ueoffuturesavings-$940,000cashout l
    ay).
    Answer(A)isi ncorrectbecauset he$300,000savingsisanannualsav ings,whichshouldbedi scountedatthepresentval
    ueofanannuityof$1f or5per i
    odsat12%
    or3.61($300,000x3. 61=$1, 083,000).The$300,000annualsav ingsshouldnotbedi scountedusingthepresentval
    ueof$1f or5peri
    odsat12%, or0.57($300,000x
    0.
    57=$171, 000) .Fur thermore,theproperlydi
    scountedamount( $1,083,000)shouldber educedbythenetcashout l
    ay($1,000,
    000-$60,000)fort
    henewequi pment .
    CMAEXAMI NATI ONQUESTI ONS Page152of152
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Answer(
    B)isincor
    rectbecausetheNPVi
    sequalt
    othepr
    esentval
    ueoffutur
    ecashsavi
    ngsminusnetini
    ti
    alcashout
    lay
    s,Answer(
    D)isincorr
    ectbecauset
    hecash
    i
    nfl
    owsgeneratedf
    rom thesaleofol
    dmachi
    ner
    yshoul
    dbeaddedtothedif
    fer
    enceoft
    hepresentv
    alueofcashinf
    lowsminust
    hepur
    chasepriceofnewmachiner
    y.

    ccxl
    vii
    .REQUI RED:TheI RRt ot
    henearestper centforreplaci
    ngt heoldmachi ne.
    DISCUSSI ON:( D)TheI RRi
    st hediscountr at
    eatwhi chthepr esentv alueofthecashflowsequalstheori
    ginali
    nvestment .Thus, theNPVoft hepr oj
    ectiszeroatthe
    I
    RR.TheI RRisal sothemaxi mum bor r
    owi ngcostthef ir
    m coul daf for
    dt opayforaspecifi
    cproj
    ect.TheI RRissimi l
    artot heyieldrat
    e/ef
    fecti
    ver at
    equot edinthe
    businessmedi al.Thef ormul
    af ort
    heI RRi nvol
    vinganannui tyequat estheannualcashf l
    ow,ti
    mesanunknownannui t
    yf actorwiththeini
    ti
    alneti
    nv estment:$940,000
    =$300, 000xFact or.Thesolutionoftheequat iongivesaf actorof3. 1333,whichi
    sfoundi nt
    he18%col umnont hefive-peri
    odline.
    Answer s(A),(
    B) ,and(C)areincorr
    ectbecausedi v
    idi
    ngt heneti nvestmentbyt heannualsavi
    ngsyiel
    dsafactorof3.1333, whichcor r
    espondstoan18%I RR.

    ccxl
    vii
    i.
    REQUI RED:Thepay backperiodfort
    henewmachi ne.
    DISCUSSI ON:( C)Thepay backmet hoddetermi
    neshowl ongitt
    akesfort
    heinvestmentdoll
    arstober ecoveredbytheannualnetcashi nfl
    ows.Thet imei scomput
    ed
    bydividi
    ngt henetinvestmentbyt heaverageperi
    odicnetcashinf
    low.Theinit
    ialnetcashoutlaydividedbytheannualcashsav ingsequal s3.
    13year s($940,
    000÷
    $300,000).
    Answer( A)isincor
    rectbecauset heini
    ti
    alcashoutl
    aydivi
    dedbytheannualcashsavingsequals3.13,not1.14.Answer(B)isincorrectbecausetheinit
    ialcashout
    lay
    di
    v i
    dedbyt heannual cashsavingsequals3.13,
    not2.78.Answer(D)isi
    ncorr
    ectbecausetheinit
    ialcashoutlayi
    s$940,000($1,000,000outlay-$60,
    000i nfl
    ow).

    ccxl
    ix.REQUI RED:Thepresentv alueofthedepr eci
    ati
    ontaxshiel
    dforthesecondyearoft hemachine’
    sli
    fe.
    DISCUSSION:( B)Theappl icabledepr eci
    ati
    onf or1997is$380,000.Atat axrateof40%,thesav i
    ngsis$152,000($380,000x40%).I
    tspresentvalueis$121,600
    ($152,000x0.80PCof$1f ort woper iodsat12%) .
    Answer( A)isi
    ncorr
    ectbecauset hepresentvalueofthedepreci
    ati
    ontaxshiel
    dequalst hepr
    esentvalueoftheproductof1990depr
    eci
    ati
    onmul t
    ipl
    i
    edbyt hetaxr ate
    of40%.Answer( C)isincor
    r ectbecause$109, 440isthepresentval
    ueofthetaxsavingdiscountedat18%,nottherequi
    red12%.Answer(D)i
    sincorrectbecauset he
    presentvalueoft
    hedepreciationt axshiel
    disthePVof$1f or2per i
    odsat12%t i
    mest hesavingsof$152,
    000($380,000x40%) .

    ccl
    .REQUI RED:Thepr esentval
    ueoft heafter -
    taxcashfl
    owassoci atedwi t
    hthesal vageoft heoldmachi ne.
    DISCUSSION:( A)Theol dmachi newillbesol dfor$60,000,andt heenti
    resel l
    ingpr i
    cerepresentsat axablegai nbecauset hebookv al
    ueiszero.Ata40%t axrate,
    thetaxis$24,000.Howev er,t
    het axwi l
    lnotbepai dunt i
    ltheendoft hey ear.Di scounti
    ngt hetaxpay mentsr esult
    si napr esentval
    ueof$21,360($24,
    000x0. 89).
    Thisamounti ssubtract
    edfrom the$60, 000selli
    ngprice(notdiscountedbecauser ecei
    vedimmedi atel
    y)toy i
    eldanaf ter-
    taxNPVof$38, 640.
    Answer( B)isincorr
    ectbecauset he$24, 000taxpaymentt obepai datyear-
    endshoul dbediscount edusi ngthepr esentv aluefactorof0.89.Answer(C)i
    sincorrect
    becauset he$60,000pay mentreceivedf orthemachineryisreceivedimmedi atelyuponsale,andt hereforeshoul dnotbedi scounted.Answer(D)isi
    ncorr
    ectbecause
    onlythediscountedamountofi ncomet axshoul dbesubt r
    actedfrom the$60, 000receivedforthemachi nery.

    ccl
    i
    . REQUI RED:Thepr esentval
    ueoftheannualaft
    er-t
    axcashsav i
    ngst hatar
    isefr
    om t henewmachi newithoutconsider
    ati
    onofthedepreci
    ati
    ontaxshiel
    d.
    DISCUSSION:( D)Theannualsav i
    ngsof$300,000mustber educedbyt he40%t ax,sot heneteffectofpurchasingthenewmachi neisanannualcashsavingsof
    $180,
    000[ (1–0.4)x$300, 000]
    .Thepresentval
    ueoft heaf
    ter-
    taxsav i
    ngsisther
    efore$649,800($180,000x3. 61PVofanor di
    naryannuit
    yforfi
    veperi
    odsat12%).
    Answer( A)isincor
    rectbecause$563,400isthepr esentv
    alueoft heannualafter-t
    axcashsav ingsdiscountedat18%,notthef i
    rm’srequi
    red12%.Answer( B)is
    i
    ncorrectbecausetheannualsav i
    ngsmustber educedbythe40%t ax.Thisisachievedbymul t
    iplyi
    ngannualsavingsby1–0. 4,not1–0. 6.Answer(C)isi
    ncorr
    ect
    CMAEXAMI NATI ONQUESTI ONS Page153of153
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    becauset
    hepr
    esentv
    aluei
    stheannual
    aft
    er-
    taxsav
    ingsdi
    scount
    edatt
    hePVofanor
    dinar
    yannui
    tyf
    orf
    iveper
    iodsat12%.

    ccl
    i
    i. REQUI RED:Thepr esentval
    ueoft headdi t
    ionalaft
    er-
    taxcashf lowr esul
    ti
    ngf r
    om af utur
    esaleoft henewmachi ne.
    DISCUSSI ON:( B)Atthetimeofsal e,
    thenewmachi newi llbefull
    ydepr eci
    ated,andanysal eproceedswi l
    lbeful
    lytaxabl
    easagain.Hence,t
    he$80,000taxabl
    egain
    willr
    esultin$32,000oftax($80,000x0. 40),andtheaf t
    er-taxcashf l
    owwi l
    lbe$48, 000.I t
    spresentv al
    uewillbe$27,360($48,
    000x0.57PVof$1forfiveperi
    odsat
    12%) .
    Answer( A)isincorr
    ectbecauset heaft
    er-taxcashf l
    owof$48, 000, notthe$32,0000oft ax,shouldbediscountedatthePVf act
    orof$1for5per
    iodsat12%.Answer
    (C)isincorrectbecausethe$32,000oft axshouldbededuct edfrom t hesaleamountbef or
    ediscountingtheafter-
    taxcashfl
    ow.Answer(D)isincorr
    ectbecause
    $48,000istheaf t
    er-
    taxcashinf
    low, whichneedst obedi scountedtoi t
    sPV.

    ccl
    i
    ii
    .(3,
    750+3,
    750+11,
    250+11,
    250)
    /4)
    /(100,
    000/
    2)
    ccl
    i
    v
    . Accr
    ual account
    ingi
    ncome =$103,
    000-(
    ($250,
    000-$10,
    000)
    /5)
    =$103,000-$48,000
    =$55,000

    AARRwi
    thi
    nit
    ial
    inv
    est
    ment =$55,000/(
    $250,
    000+$25,
    000)
    =$55,
    000/
    $275,
    000
    =0.
    20
    ccl
    v
    .a.Cashflowfr
    om sale:$116,
    000 (
    $120,000-40%t axonthe$10,000taxgai
    n)
    b.I
    ncreaseinannual
    cashoutfl
    ows:$20,800 ($20,
    000pretaxcostincr
    ease+$800i
    ncr
    easei
    nincomet
    axes;
    the$20,
    000i
    ncr
    easei
    ncashcost
    sismor
    ethanof
    fset
    bylosi
    nga$22,000depreci
    ati
    ondeducti
    on)
    ccl
    vi
    .I
    nv est
    mentrequir
    ed÷Netannual cashi
    nflow=
    Factoroft
    heinternal
    rat
    eofr et
    urn
    $83,
    150÷Netannual cashinfl
    ow=3.326
    $83,150÷3.326=Netannual cashi
    nfl
    ow
    =$25,000
    ccl
    vi
    i
    .
    Unit NetPr etax
    Year Est imatedUni
    tSales Variabl
    e Unit CashInf l
    ows
    Demandi n Pri
    ce Cost Cont
    ribut
    ion From Sal es
    Unit
    s Margin
    1 10,000 $15 $7 $8 $80,000
    2 10,000 15 7 8 80,
    000
    CMAEXAMINATIONQUESTI ONS Page154of154
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    3 10,
    000 15 7 8 80,
    000
    4 10,
    000 15 7 8 80,
    000
    5 10,
    000 15 7 8 80,
    000

    Totalnetpret
    axcashi nf
    lowsfrom sal
    es $400,
    000
    I
    niti
    alcashoutfl
    ow( costofasset) $250,000
    Lesspretaxesti
    matedsal v
    agev al
    ue (
    50,000) 200,000
    Excessofnetpretaxcashinfl
    owsov ercost $200,
    000
    ccl
    vi
    ii
    . a. Cashfl
    owfrom sale:$90,
    000 ( $70,
    000+40%taxsavingsonthe$50,000taxloss)
    b.Incr
    easeinannual
    cashout fl
    ows:$27,600 ($30,
    000pr
    etaxcostincr
    ease-$2,400decreasei
    nincomet
    axes;
    the$30,
    000i
    ncr
    easei
    ncashcost
    sispar
    ti
    all
    yof
    fset
    bylosi
    nga$24,000depreciat
    iondeduction)
    ccl
    i
    x
    .
    a.Netinvest
    ment :$124,000[$300,
    000-$160,
    000-40%x( $200,
    000-160,
    000)
    ]
    b.Incr
    easeinincomet axes:$5,
    000 [40%x($37,
    500pret
    axflow-$75,
    000depreci
    ati
    on+$50,
    000l
    ostdepr
    eci
    ati
    on)
    ]
    c.I
    ncr
    easeincashf l
    ows:$32,500 ($37,
    500-$5,
    000incr
    easeinincometax
    es)
    ccl
    x
    .a.Netinvest
    ment :$74,000 [$150,000-$60,
    000-40%(
    $100,000-60,000)
    ]
    b.Incr
    easeinincomet axes:$16,000 [40%x($50,
    000pret
    axflow-$30,000depr
    eci
    ati
    on+$20,
    000l
    ostdepr
    eci
    ati
    on)
    ]
    c. I
    ncr
    easeincashf l
    ows:$34, 000 ($50,
    000-$16,
    000incr
    easeinincometaxes)
    ccl
    xi
    .
    Pr
    edi
    cted Year
    (s) PV PVof
    CashFl
    ows Fact
    or Cash
    Flows
    I
    nit
    ial
    Inv
    est
    ment $(
    160,
    000) 0 1.000 $(
    160,000
    )
    Sal
    vageofold 20,
    000 0 1.000 20,000
    Annual
    operat
    ions 40,
    000 1-
    3 2.322 92,880
    Annual
    operat
    ions 20,
    000 4-
    6 (
    3.889- 31,340
    2.
    322)
    Sav e by not 40,
    000 1 0.877 35,080
    rebuil
    ding
    Salvageofnew 24,
    000 6 0.
    456 10,
    944
    Netpresentv
    alue $ 30,
    244
    ccl
    xi
    i
    .
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page155of155
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Descr
    ipt
    ion Year
    s Amount 16% Present
    Factor Value
    Van&equi
    pment 0 (
    $125,00 1.000 (
    $125,000)
    0)
    Wor
    kingcapi
    tal 0 (
    $60,000 1.
    000 (
    $60,
    000)
    )
    Bui
    l
    dingr
    ent 1-
    6 (
    $35,000 3.
    685 (
    $128,
    975)
    )
    Netannual cashinf
    low 1-
    6 $80,
    000 3.
    685 $294,800
    Salvagev al
    ue, 6 $5,000 0.
    410 $2,050
    equipment
    Releaseofwor ki
    ng 6 $60,
    000 0.
    410 $24,
    600
    capital
    Netpr esentval
    ue $7,
    475
    ccl
    xi
    ii
    .
    Year Expl
    anat
    ion Amount 12% Present
    Factor Value
    0 I
    nvestmenttoupdat
    e $(500,00 1.000 $(500,000)
    asset
    s 0)
    1-
    9 Annualcashi
    nfl
    ows 1,
    805,00 5.
    328 9,
    617,
    040
    0
    9 Sell
    ingpr i
    cefort
    he 600,000
    0.
    361 216,600
    divi
    sion.
    Netpr esentv
    alue $9,333,640
    Thesal
    espr
    iceof$9,000,
    000islesst
    hant
    hepr
    esentval
    ueoft
    hecashf l
    owsr
    esul
    ti
    ngf
    rom r
    etai
    ningt
    hedi
    vi
    sion.Gener
    alt
    husshoul
    dnotacceptt
    heof
    fer
    .
    ccl
    xi
    v
    .
    Descr
    ipt
    ion Year
    s Amount 10% Present
    Factor Value
    Equi
    pment 0 (
    $300,00 1.000 (
    $300,000)
    0)
    Wor
    kingcapi
    tal 0 (
    $50,000 1.
    000 (
    $50,
    000)
    )
    Netannual
    cashi
    nfl
    ow 1-
    7 $70,
    000 4.
    868 $340,760
    Sal
    vageval
    ue, 7 $5,000 0.
    513 $2,565
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page156of156
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    equipment
    Releaseofworking 7 $50,
    000 0.
    513 $25,
    650
    capital
    Netpresentvalue $18,
    975
    ccl
    xv
    .
    Descr
    ipt
    ion Year
    s Amount 16% Present
    Factor Value
    Equi
    pment 0 (
    $100,00 1.000 (
    $100,000)
    0)
    Wor
    kingcapi
    tal 0 (
    $40,000 1.
    000 (
    $40,
    000)
    )
    Bui
    l
    dingr
    ent 1-
    6 (
    $24,000 3.
    685 (
    $88,
    440)
    )
    Netannual cashinf
    low 1-
    6 $60,
    000 3.
    685 $221,100
    Salvagev al
    ue, 6 $10,
    000 0.
    410 $4,100
    equipment
    Releaseofwor ki
    ng 6 $40,
    000 0.
    410 $16,
    400
    capital
    Netpr esentval
    ue $13,
    160
    ccl
    xvi
    . Pr
    esent
    Year
    s Amount 14%Factor Val ue
    Worki
    ngcapitali
    nvestment Now $(
    100,
    000) 1. 000 $(100,000)
    Annualcashinf
    lows...
    ..
    . 1-
    5 17,000 3.
    433 58, 361
    Worki
    ngcapitalrel
    eased 5 100,000 0.
    519 51, 900
    Netpresentv
    alue...
    ..
    ..
    . $10,261

    Yes,
    thedi
    str
    ibut
    orshi
    pshoul
    dbeaccept
    edsi
    ncet
    hepr
    ojecthasaposi
    ti
    venetpr
    esentv
    alue.
    ccl
    xvi
    i
    . Present
    I
    tem Years Amount 14%Fact or Val ue
    I
    nvestment now ($16,000) 1.
    000 ($16,000)
    Annualcashi
    nfl
    ows...
    ..
    ..
    ..
    ..
    ..
    .. 1-12 3,600 5.
    660 20, 376
    Worki
    ngcapit
    alrequi
    red..
    ..
    ..
    ..
    ..
    ..
    ..now (4,500) 1.
    000 (4,500)
    Worki
    ngcapit
    alrel
    eased..
    ..
    ..
    ..
    ..
    ..
    ..12 4,500 0.
    208 936

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page157of157
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Sal
    vagev al
    ueequi
    pment.
    ..
    ..
    ..
    ..
    ..
    ..12 2,
    000 0.
    208 416
    Netpresentval
    ue $1,
    228
    ccl
    xvi
    i
    i
    . Present
    Proj
    ectA: Amount12%Factor Value
    Cashinvestmentnow...
    ..
    ..
    ..
    ..
    ..
    . (
    $15,
    000) 1. 000 ($15,000)
    Cashinfl
    owatt heendof5y ears $21,
    000 0.
    567 $11,907
    Cashinfl
    owatt heendof8y ears $21,
    000 0.
    404 $8, 484
    Netpresentval
    ue..
    ..
    ..
    ..
    ..
    ..
    ..
    .. $5,391

    Proj
    ectB:
    Cashinvestmentnow...
    ..
    ..
    ..
    ..
    ..
    . ($11,000) 1. 000 (
    $11,
    000)
    Annualcashoutfl
    owf or5years.
    . ($3,000) 3. 605 (
    $10,
    815)
    Addi
    tionalcashi
    nfl
    owatt heendof5y
    ear
    s..
    ...
    ..
    ..
    ..
    ..
    .. $21,
    000 0.
    567 $11,
    907
    Netpresentval
    ue..
    ..
    ..
    ..
    ..
    ..
    ..
    .. ($9,
    908)

    Proj
    ectC:
    Cashinvestmentnow ($21,
    000) 1.
    000 (
    $21,
    000)
    Annualcashinfl
    owf or4y ear
    s $11,
    000 3.
    037 $33,
    407
    Cashoutfl
    owatt heendof3y ear
    s ($5,
    000) 0.
    712 ($3,
    560)
    Addi
    tionalcashinf
    lowatt heendof4y
    ear
    s$15,000 0.
    636 $9,540
    Netpresentval
    ue..
    ...
    ..
    ..
    ..
    ..
    ..
    . $18,
    387
    ccl
    xi
    x
    . a. I
    nvest
    mentr
    equi
    red÷Netannual
    cashi
    nfl
    ow=Pay
    backper
    iod
    $60,
    000-$5,000)÷($18,000+$12,000)=1.
    83year
    s(rounded)
    b.Increment
    alnetincome÷I nvest
    ment=Si mpl
    erat
    eofret
    urn
    $18,
    000÷$55, 000=32.7%( r
    ounded)
    ccl
    xx
    .
    a.Pay
    backper
    iod:3.
    0year
    s(30,
    000+60,
    000+90,
    000)

    b.Bookrateofr et
    urn:20%
    Aver
    ager eturn:$54,
    000( $270,
    000tot
    al/5y ear
    s)
    Depr
    eciation: 36,000( $180,
    000/5years)
    Aver
    ageincome $18, 000
    Aver
    ageinv estment:$180,000/2=$90,000
    Bookrateofr et
    urn=$18, 000/$90,
    000=20%

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page158of158
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    c. NPV:
    $6,
    930
    Cash Fact
    or PV
    1 30,000 .
    893 26,790
    2 60,000 .
    797 47,820
    3 90,000 .
    712 64,080
    4 60,000 .
    636 38,160
    5 30,000 .
    567 17,010
    193, 860
    I
    nvest
    ment 180, 000
    NPV 13,860
    ccl
    xxi
    . a. Pay
    backper
    iod:3.
    15y
    ear
    s(75,
    000+90,
    000+115,
    000+.
    15x130,
    000)

    b.Bookrateofr et
    urn: 33.3%
    Aver
    ager eturn: $100,000 ($600,
    000tot
    al/6year
    s)
    Depr
    eciation: 50,
    000 ($30,
    000/6years)
    Aver
    ageincome $50, 000
    Aver
    ageinv estment:$300,000/2=$150,000
    Bookrateofr et
    urn= $50,000/150,
    000=33.3%

    c. NPV:
    $130,
    530
    Cash Fact
    or PV
    1 75,000 .
    909 68,175
    2 90,000 .
    826 74,340
    3 115,000 .
    751 86,365
    4 130,000 .
    683 88,790
    5 100,000 .
    621 62,100
    90,000 .
    564 50,760
    430, 530
    I
    nvest
    ment 300, 000
    PV 130, 530
    ccl
    xxi
    i
    . ( 1) $100, 000/$16,000=6. 25year
    spay backperiod
    (2)[($160,000-$90,000)/10y r
    s.]/[(
    $100,000+$10,000)/2]=12.
    73%account
    ingrat
    eofr et
    urnonaver
    ageinv
    estment
    (3)Netpr esentvalue=PVoft enannualcashinfl
    owsof$16, 000+PVofinf
    lowfrom sal
    vageintent
    hyear–Origi
    nal
    inv
    est
    ment
    $2,180=( $16,000x6. 145+( $10,000x0.386)–($100,000)

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page159of159
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    ccl
    xxi
    i
    i
    123.
    a. Costsavi
    ngspery
    ear $5,
    000
    Maint
    enancepery
    ear (
    700)
    Netcashfl
    owsperyear $4,
    300

    Cash Discountf
    actor Presentv al
    ue
    $30,
    000 1.0000 $(30,000.00)
    4,
    300 5.5348 23,799.64
    Netpresentv
    alueofinvestment $(6,200.36)

    b. Pay
    backequal
    s$30,
    000/
    $4,
    300=6.
    976y
    ear
    s

    ccl
    xxi
    v
    120. (
    a)
    Cashf
    low Year Amount Di
    scount Pr
    esentvalue
    f
    actor
    I
    nvest
    ment 0 $(
    100,
    000) 1.00 $(100,
    000)
    Worki
    ngcap. 0 $(
    200,
    000) 1.00 (
    200,000)
    Cashi
    nfl
    ow 1 100,
    000 .8621 86,210
    Cashi
    nfl
    ow 2 150,
    000 .7432 111,480
    Cashi
    nfl
    ow 3 200,
    000 .6407 128,140
    Cashi
    nfl
    ow 4 200,
    000 .5523 110,460
    Worki
    ngcap. 4 200,
    000 .5523 110,460
    Netpr
    esentv
    alue $246,750

    (
    b) Af terthefi
    rsttwoy ear
    s,$250,
    000oftheor
    igi
    nal$300,
    000i
    nvest
    mentwoul
    dber
    ecouped.I
    twoul
    dtakeone-
    quar
    teroft
    het
    hir
    dyear(
    $50,
    000/
    $200,
    000)t
    o
    r
    ecoupt
    helast$50,000.Thus,thepay
    backperi
    odis2.
    25y ear
    s.

    ccl
    xxv
    . a. Annual
    cashinf
    low $60,
    000
    Pr
    esentval
    uef
    act
    orfor10y
    ear
    s x5.
    650
    I
    nit
    ial
    inv
    est
    ment $339,
    000

    b.Pay
    backper
    iod=$339,
    000/
    $60,
    000=5.
    65y
    ear
    s

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page160of160
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    c. I
    nit
    ial
    inv
    est ment $62,900
    PVofsalvageval
    ue($10,
    000x0.275) (
    2,750)
    NetPVofannualnetcashi
    nfl
    ow $60,150

    Annual
    cashi
    nfl
    ow=$60,
    150/
    3.020=$19,
    917.
    22

    d.Pay
    back=$62,
    900/
    $19,
    917.
    22=3.
    158

    e. Annual
    netcashi
    nfl
    ow=$226,
    000/
    5.650=$40,
    000

    f
    . PVf
    act
    orf
    or10y
    ear
    s=$226,
    000/
    $40,
    000=5.
    650

    Lookupv
    alue5.
    650i
    nPVofannui
    tyt
    abl
    eunder10y
    ear
    sandt
    hei
    nter
    nal
    rat
    eofr
    etur
    nis12%.
    ccl
    xxv
    i
    . a. Annualcashf
    low:
    60%x[ 125,
    000x($200-$130)]–(60%x$6,000,
    000)+(40%x$7,
    200,
    000/4)
    =$2,370,
    000
    NPV:[(
    $2,370,
    000x3.037)-$7,
    200,
    000-500,
    000+( $500,
    000x.
    636)
    ]=($184,310)

    b.PI
    :0.
    976[
    ($2,
    370,
    000x3.
    037+500,
    000x.
    636)
    /($7,
    200,
    000+500,
    000)
    ]
    ccl
    xxv
    ii
    .a.
    Pr
    edicted Year
    (s) PVFact
    or PVofCash
    CashFlows Flows
    I
    nit
    iali
    nvestment $( 20,960) 0 1.
    000 $(
    20,960)
    Annual 5,000 10 4.
    833 24,165
    operat
    ions
    Net pr esent $ 3, 205
    val
    ue

    b.Pr
    esentval
    uefactorofanannui
    tyof$1.
    00=$20,960/
    $5,
    000=4.
    192.
    Fr
    om annui
    tyt
    able,the4.
    192factori
    scl
    osestt
    othe10-y
    earr
    owatthe20%col
    umn.Ther
    efor
    e,t
    heI
    RRi
    s20%.
    ccl
    xxv
    ii
    i
    .a.
    Pr
    edi
    cted Year
    (s) PV PVof

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page161of161
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    CashFl
    ows Fact
    or Cash
    Flows
    Ini
    ti
    alinv
    est ment $(
    95,
    000) 0 1.
    000 $(
    95,000)
    Annual oper ati
    ons, 18,000 1-8 4.
    639 83,502
    net
    Salvagev al
    ue,wor k 14,
    500 8 0.
    351 5,
    090
    cap
    Netpr esentval
    ue $(
    6,408)

    b.Tri
    alander rorisnecessar
    y .Youknowi
    tisbel
    ow14%becausetheanswert
    oPar
    tAwasnegat
    iveand,t
    her
    efor
    e,l
    esst
    hant
    hedi
    scountr
    ate.Ther
    efor
    e,l
    et'
    str
    y
    12%.
    Predicted Year
    (s) PVFactor PVOf
    CashFl ows CashFl
    ows
    Ini
    ti
    alinv
    est ment $(
    95, 000) 0 1.000 $(
    95,
    000)
    Annual oper at
    ions, 18, 000 1-8 4.968 89,
    424
    net
    Salvagev al
    ue,wor k 14,500 8 0.404 5,
    858
    cap
    Netpr esentvalue $ 282

    The(
    almost
    )zer
    onetpr
    esentv
    aluei
    ndi
    cat
    esani
    nter
    nal
    rat
    eofr
    etur
    nofappr
    oxi
    mat
    ely12%.
    ccl
    xxi
    x
    . a. NPV: $78,
    000 [ (5.
    650x$120,000)-$600,
    000]
    b.Paybackper
    iod: 5years ( $600,000/
    $120,
    000)
    c. I
    RR: 15% (5.
    0isabouthalf
    waybetween5.216and4.833)
    ccl
    xxx
    . a. NPV: $36,
    300 [
    (3.
    605x$60,000)-$180,
    000]
    b.Paybackperi
    od: 3years(
    $180,000/$60,
    000)
    c. I
    RR:between18%and20% (3.
    0isbetween3.127and2.991)
    ccl
    xxxi
    . a.
    Pr
    edicted Year
    (s) PV PVof
    Cash Fact
    or Cash
    Flows Flows
    I
    nvest
    ment $(
    36,586) 0 1.
    000 $(
    36,586)
    Worki
    ng capi
    tal (4,000) 0 1.
    000 (
    4,000)
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page162of162
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    needed
    Annualoperati
    ons 10,
    000 1-
    5 3.
    433 34,
    330
    Working capi
    tal 4,
    000 5 0.
    519 2,
    076
    ret
    urned
    Salv
    agev al
    ue 4,
    000 5 0.
    519 2,
    076
    Netpresentval
    ue $(
    2,104)

    b.Tr
    ial
    ander rorisrequir
    ed.Becausenetpr
    esentval
    ueisnegat
    iveinparta,
    thei
    nter
    nal
    rat
    eofr
    etur
    nisl
    esst
    han14%.St
    artbyt
    ryi
    ng12%.
    Predict
    ed Year (s) PV PVof
    Cash Factor Cash
    Fl
    ows Flows
    Investment $(36,
    586) 0 1.
    000 $( 36,586)
    Wor king capital (4,
    000) 0 1.
    000 (4,000)
    needed
    Annual operati
    ons 10,
    000 1-5 3.
    605 36,050
    Wor king capital 4,
    000 5 0.
    567 2,268
    ret
    ur ned
    Salvagev al
    ue 4,
    000 5 0.
    567 2,268
    Netpr esentval
    ue $-0-

    Wi
    thazer
    onetpr
    esentv
    alue,
    thei
    nter
    nal
    rat
    eofr
    etur
    nis12%.

    c. Pay
    backper
    iod=(
    $36,
    586+$4,
    000)
    /$10,
    000=4.
    06y
    ear
    s.
    ccl
    xxxi
    i
    .(
    1) $100,
    000/
    $29,
    129=3.
    4year
    spay
    backper
    iod

    (
    2)(
    $29,
    129x3.
    605)-$100,
    000=$5,
    010netpr
    esentv
    alue

    (
    3)$100,000/
    $29,
    129=3.433discountf
    actor
    Presentval
    ueof$1r
    eceivedannuall
    yfor5year
    sat14%i
    nter
    esthasaf
    act
    orequal
    to3.
    433.Thei
    nter
    nal
    rat
    eofr
    etur
    nont
    hepur
    chasei
    s14%.

    (
    4)Yes.Thenetpr
    esentv
    aluei
    sposi
    ti
    veandt
    hei
    nter
    nal
    rat
    eofr
    etur
    n(14%)i
    smor
    ethant
    hedi
    scountr
    ate(
    12%)
    .
    ccl
    xxxi
    i
    i
    . a. Si
    ncedepr
    eci
    ati
    oni
    stheonl
    ynoncashi
    tem ont
    hei
    ncomest
    atement
    ,thenetannual
    cashflowcanbecomput
    edbyaddi
    ngbackdepr
    eci
    ati
    ont
    oneti
    ncome.
    Netincome…..
    ..
    ..
    ..
    .. $200,
    000

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page163of163
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Depreci
    ati
    on…...
    ..
    ..
    . 100,
    000
    Netannualcashfl
    ow… $300,
    000

    Present
    Years Amount 12%Factor Value
    I
    niti
    ali
    nvest ment Now $(
    1,000,000) 1.
    000 $(1,
    000,000)
    Netannual cashfl
    ows 1-10 300,000 5.
    650 1, 695,
    000
    Netpresentval
    ue $ 695,
    000

    b.Theformulaforcomput
    ingt
    hefactoroftheint
    ernal
    rat
    eof r
    etur
    n(I
    RR)i
    s:
    I
    nvestmentrequir
    ed÷Netannualcashinfl
    ow=Factoroft
    heI
    RR
    $1,
    000,000÷$300,000=3.333

    26%fact
    or…..
    ..
    . 3.
    465 3.
    465
    Truef
    actor….
    ..
    . 3.
    333
    28%fact
    or ____
    _ 3.
    269
    0.
    132 0.
    196

    26%+2%(
    0.132÷0.
    196)=27.
    3%

    c. Theformulaf
    orthepaybackper
    iodis:
    Inv
    estmentrequi
    red÷Netannualcashi
    nfl
    ow=Pay
    backper
    iod
    $1,000,
    000÷$300,000=3.33year
    s

    d.Theformulaf
    orthesimplerat
    eofr
    etur
    nis:
    Netincome÷Ini
    tiali
    nvest
    ment=Si
    mplerat
    eofr
    etur
    n
    $200,000÷$1,
    000,000=20.0%
    ccl
    xxxi
    v
    .(
    1) $45,
    000i
    nit
    ial
    out
    lay
    /$12,
    000annual
    out
    fl
    ow=3.
    75pay
    backy
    ear
    s

    (
    2)Cashi
    nfl
    ow($12,
    000x3.
    791) $45,
    492
    I
    nvest
    ment 45,
    000
    Netpr
    esentv
    alue $ 492

    (
    3)$45,
    000x.
    621=$27,
    945
    ccl
    xxxv
    . a. Year Amount 10%Fact
    orPr
    esentVal
    ue
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page164of164
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    I
    nvestmentrequir
    ed now (
    $25,
    000) 1.
    000 (
    $25,000)
    Annualcostsavi
    ngs 1-
    15 3,
    500 7.
    606 26,621
    Sal
    vagev al
    ue..
    ..
    . 15 1,
    000 0.
    239 239
    Netpresentval
    ue $1,860

    b.Year Amount 10%FactorPr


    esentValue
    Annualcashi
    nfl
    ows 1-8 $5,000 5.335 $26,
    675
    Si
    ncethepresentv
    alueoft
    hecashinfl
    owsis$26,675,thecompanyshoul
    dbewi
    l
    li
    ngt
    opayupt
    othi
    samountt
    oacqui
    ret
    hemachi
    ne.

    c. I
    nvestmentr equir
    ed÷Netannual cashf
    low=Fact
    oroft
    hei
    nter
    nal
    rat
    eofr
    etur
    n
    $30,000÷%6, 000=5. 000
    14%f actor..
    ...
    ..
    ..
    ..
    .5.216 5. 216
    Truef act
    or...
    ...
    ..
    ..
    .5.000
    16%f actor..
    ...
    ..
    ..
    ..
    . 4.833
    0.216 0. 383

    14%+2%(
    0.216÷0.
    383)=15.
    1%

    Themachi
    neshoul
    dbepur
    chased,
    sincet
    hei
    nter
    nal
    rat
    eofr
    etur
    nisgr
    eat
    ert
    hant
    her
    equi
    redr
    ateofr
    etur
    n.
    ccl
    xxxv
    i
    .a. Thepr esentvalueoft he$12, 000annuityi
    sfoundbymul t
    ipl
    ying$12,000byt heannuit
    ydi scountfact
    orassociat
    edwith6percentinterestforfoury
    ears:
    $12,000 3. 4651=$41, 581.20.
    From thei nformationont heprofit
    abili
    tyindex,i
    tisknownt hatthepresentv al
    ueoft hecashi nflowsis1.03953t i
    mestheinit
    iali
    nvestment .Thus,theini
    ti
    al
    i
    nv estmentis$41, 581.20/1.03953=$40, 000.
    b.Bydi v
    iding$40, 000byt heannual cashinfl
    owof$12,000,i
    tisdeterminedthatthediscountfact
    orassoci at
    edwiththeIRRis3.
    3333.Thi
    sdi scountfactoris
    associatedwi thaninterestratethatli
    esbet ween7and8per cent
    .Usinginter
    polati
    on,theIRRiscomput edtobeappr oxi
    matel
    y7.72percent.

    ccl
    xxxv
    ii
    .a. Annualcashf
    lows:$27,000 [
    $35,000-40%x(
    $35,
    000-$15,
    000)
    ]
    b.Paybackperi
    od:5.56year
    s( $150,
    000/$27,
    000)
    ccl
    xxxv
    ii
    i
    .a. Annualnetcashf
    lows:$14,
    800 [
    $18,
    000pretax-40%x(
    $18,
    000-$10,
    000depr
    eci
    ati
    on)
    ]
    b.NPV:Negati
    ve$16,380 [
    ($14,
    800x5.
    650)-$100,
    000]
    ccl
    xxxi
    x
    . a.I
    ncomebefor
    etaxes,
    250,
    000x(
    $60-$40)-$3,
    000,
    000-$5,
    000,
    000/4$750,
    000
    I
    ncomet ax (
    300,
    000)
    Netincome $450,000
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page165of165
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Pl
    usdepreci
    ati
    on 1,
    250,
    000
    Netcashfl
    ow $1,
    700,
    000

    b.Pay
    backper
    iod:2.
    94y
    ear
    s($5,
    000,
    000/
    $1,
    700,
    000)

    c.NPV:$389,
    000 [
    ($1,
    700,
    000x3.
    170)-$5,
    000,
    000]
    ccxc
    .
    a.Annualcashfl
    ows:$46,400 [$56,000-40%x($56,
    000-32,
    000)
    ]
    b.Paybackperi
    od:3.45years($160,000/
    $46,
    400)
    c. NPV:
    $7,272 [(
    $46,400x3.605)-$160,
    000]
    ccxci
    .
    a.I
    ncomebef oretax
    es,
    [200,
    000x(
    $40-$27)-$1,
    500,
    000-$3,
    500,000/4] $225,
    000
    I
    ncomet ax( 40%) (90,000)
    Pl
    usdepr eciati
    on 875,000
    Netcashf l
    ow $1,010,000

    b.Pay
    backper
    iod:3.
    47y
    ear
    s($3,
    500,
    000/
    $1,
    010,
    000)

    c. NPV:
    negat
    ive$298,
    300 [
    ($1,
    010,
    000x3.
    170)-$3,
    500,
    000]
    ccxci
    i
    . a. Incr
    easeinannual
    netcashfl
    ow:$148,
    000 [$200,
    000-40%x(
    $200,
    000-$70,
    000)
    ]
    b.Pr
    ofi
    tabi
    li
    tyi
    ndex:1.19 [
    ($148,
    000x5.
    65)/
    $700,
    000]
    ccxci
    i
    i
    . a. I
    ncreaseinannualnetcashfl
    ow:$22,000 [$30,000-(40%x($30,000-$10,
    000)
    ]
    b.Pr ofit
    abil
    it
    yindex:1.24 [($22,
    000x5.65)/
    $100,
    000]
    c. Effectonprofit
    abil
    i
    tyindex:Incr
    ease (PIwoul
    dincreasebecauset
    het axshiel
    dofdepr
    eci
    ati
    onwoul
    doccurear
    li
    erandsobemor
    eval
    uabl
    ewhenconsi
    der
    ingt
    he
    ti
    mev al
    ueofmoney .)
    ccxci
    v
    . a. Annualnetcashf
    lows:$57,600 [$80,
    000pret
    ax-40%x($80,
    000-$24,
    000depr
    eci
    ati
    on)
    ]
    b.NPV:$17,640[ (
    $57,
    600x5.650)-$240,000-$100,
    000+($100,
    000x.322)
    ]
    c. PI
    :1.
    052{[($57,
    600x5.650)+($100,000x.322)
    ]/(
    $240,
    000+$100,
    000)}
    ccxcv
    . a. Annualnetcashfl
    ows:$550,000[$750,000-40%x($750,
    000-$250,
    000depr
    eci
    ati
    on)
    ]
    b.NPV:$434,400 [ (
    $550,
    000x4.968)-$2,
    000,000-$500,
    000+($500,
    000x.404)
    ]
    c. PI
    :1.
    17{[
    ($550,000x4.968)+(
    $500,000x.404)]/(
    $2,
    000,
    000+$500,
    000)}
    ccxcv
    i
    . a. Annual
    netcashf
    lows:$2,
    325,
    000

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page166of166
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    [
    $2,
    875,
    000pr
    etax-40%x($2,875,
    000-$1,
    500,
    000depr
    eci
    ati
    on)
    ]
    pr
    etaxi
    ncome=275,000x($60-$35)-$4,
    000,
    000=$2,
    875,
    000

    b.NPV:$775,
    050[
    ($2,
    325,
    000x2.
    914)-$6,
    000,
    000]

    c. Al
    l
    owabl
    elossofX-
    10sal
    es,appr
    oxi
    mat
    ely36,
    941uni
    ts[
    ($775,
    050/
    2.914)
    /60%]
    /12

    d.Al
    l
    owableerr
    ori
    nper -
    unitVC,$1.
    61
    {[
    ($775,
    050/
    2.914)/
    60%]/275,
    000uni
    ts}
    ccxcv
    ii
    a. Annualnetcashf
    lows:$26, 200 [
    $33,
    000pretax-40%x($33,
    000-$16,
    000depreci
    ati
    on)
    ]
    b.NPV:Negat i
    ve$11,970 [
    ($26,200x5.650)-$160,
    000]
    c. IRR:
    bet
    ween10%and12% [ factorof6.
    107(160,
    000/26,
    200)i
    sbetween6.
    145and5.650]
    ccxcv
    ii
    i
    126.
    a. Revenue $100,000
    -cashexpenses (60,
    000)
    Annuali
    nfl
    ow $40,000

    b. PVi
    nfl
    ow$40,
    000 4.
    4941= $179,764
    PVout
    fl
    ow$160,
    000 1.
    0= (160,
    000)
    NPV= $19,764

    c. I
    RRf
    act
    or=$160,
    000/
    $40,
    000=4.
    0whi
    chi
    sappr
    oxi
    mat
    ely23%

    d Pay
    back=$160,
    000/
    $40,
    000=4y
    rs.
    .

    e. $179,
    764/
    $160,
    000=1.
    123525

    f
    . Carwashexceedsmi
    nimum onSRRandI
    RR,
    butnotpay
    back.

    ccx
    cix
    . Presentval
    ueofkeepingcurrentsy
    stem:
    Predi
    cted Year
    (s) PV PVof
    CashFlows Factor CashFlows
    Overhaul $(40,
    000) 0 1.000 $( 40,
    000)
    CMAEXAMI NATIONQUESTI ONS Page167of167
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Annual
    operat
    ions (
    70,
    000) 1-
    5 2.
    991 (209,370)
    Sal
    vageval
    ue 5,
    000 5 0.
    402 2,
    010
    Net present $(247,360)
    val
    ue

    Pr
    esentv al
    ueofnewsystem:
    Predicted Year
    (s) PV PVof
    CashFl ows Factor CashFlows
    Inv
    est ment $(100,000) 0 1.000 $(100,
    000)
    Salvage v al
    ue, 20, 000 0 1.000 20,
    000
    old
    Annual (40,000) 1-
    5 2.
    991 (
    119,
    640)
    operati
    ons
    Salvagevalue 20,000 5 0.
    402 8,
    040
    Net pr esent $(
    191,600)
    val
    ue

    Buy
    ingt
    henewequi
    pmenti
    sthemostdesi
    rabl
    eby$55,
    760(
    $247,
    360-$191,
    600)
    .
    ccc
    .a.Pay
    backMet
    hod
    ProposalA ProposalB ProposalC
    Year1 $80,000 $45,000 $90,000
    Year2 10,000 45,000 .
    $90,000 $90,000 $90,000
    Pay
    back 2y ears 2y ears 1year

    NetPr
    esentVal
    ue
    Pr
    edi
    cted Year
    (s) PV PVof
    Pr
    oposalA: CashFl
    ows Fact
    or CashFl
    ows

    Inv
    estment $(
    90,
    000) 0 1.
    000 $(
    90,
    000)
    Annual
    operat
    ions:
    Year1 80,
    000 1 0.
    877 70,
    160
    Year2 10,
    000 2 0.
    769 7,
    690
    Year3 45,
    000 3 0.
    675 30,
    375
    CMAEXAMINATIONQUESTI
    ONS Page168of168
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Net pr
    esent $18,
    225
    v
    alue

    Pr
    edi
    cted Year
    (s) PV PVof
    Pr
    oposalB: CashFl
    ows Fact
    or CashFl
    ows

    I
    nvestment $(
    90,
    000) 0 1.
    000 $(
    90,
    000)
    Annual
    operat
    ions:
    Year1 45,
    000 1 0.
    877 39,
    465
    Year2 45,
    000 2 0.
    769 34,
    605
    Year3 45,
    000 3 0.
    675 30,
    375
    Netpresentval
    ue $14,445

    Pr
    edi
    cted Year
    (s) PV PVof
    Pr
    oposalC: CashFl
    ows Fact
    or CashFl
    ows

    I
    nvestment $(
    90,
    000) 0 1.
    000 $(
    90,
    000)
    Annualoper
    ati
    ons:
    Year1 90,
    000 1 0.
    877 78,
    930
    Net pr
    esent $ 11,
    070
    val
    ue

    AccrualAccounti
    ngRat
    eofRet
    urn:
    ProposalA:[80,
    000+10,
    000+45,000)
    /3-(
    90,
    000/
    3)]
    /90,
    000=0.
    167

    Pr
    oposalB:(
    45,
    000-
    30,
    000)
    /90,
    000=0.
    167

    Pr
    oposalC:(
    90,
    000-90,
    000)
    /90,
    000=0.
    0

    b. Summar y:
    Met hod Pr
    oposal
    A Pr
    oposal
    B Pr
    oposal
    C
    Payback met
    hod 2.
    5 2.
    5 1.
    0
    ranks
    Netpr esentv
    alue 1.
    0 2.
    0 3.
    0
    AARR 1.
    5 1.
    5 3.
    0
    CMAEXAMI NATI ONQUESTIONS Page169of169
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Event
    houghProposalCi
    sNumber1forpayback,i
    tcomesi nlastwiththeot
    hert
    womethods.Becausethenetpr
    esentv
    aluemet
    hodt
    akesi
    ntoaccountt
    het
    ime
    val
    ueofmoneyandtheot
    herpr
    oposal
    sar
    elesscompr ehensi
    ve,ProposalAwoul
    dbet
    hebestalt
    ernati
    ve.
    ccci
    125.
    a. Ol dl
    oss$(2,000)
    Newrecei
    pts$20,000 5%= $1,
    000
    Depr
    .$12,000/10yr
    s.= (1,
    200)
    New(Loss) $(200)

    b. Changeinannualcashinf
    lowi
    s$3,000
    Payback=$12,000/$3,
    000=4yrs.

    c. 1. PVofi
    nfl
    ow $3,
    000 4.1925= $12,
    577.
    50
    PVofout
    fl
    ow$12,000 1.0= (12,
    000.
    00)
    NPV $ 577.
    50

    2. I
    RRi
    sappr
    oxi
    mat
    ely23%

    d. Changeininf
    low=$2,700
    PVinf
    low$2,700 4.1925= $11,
    319.
    75
    PVoutfl
    ow$12,000 1.0= (12,
    000.
    00)
    NPV $(680.
    25)

    e. $12,
    000/4.
    1925=$2,862.
    25
    Recei
    pts=($2,
    862.
    25-$2,000)
    /.05=$17,
    245

    ccci
    i
    .
    . a. Year Cashflow Discountf actor Pr
    esentv
    alue
    1 $150,000 1.0000 $(150,000.00)
    1 32,000 .9009 28,828.80
    2 57,000 .8116 46,261.20
    3 5,000 .7312 3,656.00
    4 28,000 .6587 8,443.60
    5 16,000 .5935 9,496.00
    6 3,000 .5346 1,603.80
    7 15,000 .4817 7,225.50
    7 70,000 .4817 33,719.00
    CMAEXAMI
    NATI
    ONQUESTIONS Page170of170
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Netpr
    esentv
    alue $(
    766.
    10)

    b.Pr
    ofi
    tabi
    l
    ityi
    ndexequal
    spr
    esentv
    alueofcashf
    lowsdi
    vi
    dedbyi
    nvest
    ment
    :$149,
    233.
    90/
    $150,
    000=.
    995

    c. Pay
    backper
    iodi
    s6.
    11y
    ear
    s,comput
    edasf
    oll
    ows:

    Year CashFl
    ow Cumul
    ati
    veCashFl
    ow
    1 $32,
    000 $32,000
    2 57,
    000 89,
    000
    3 5,
    000 94,
    000
    4 28,
    000 122,
    000
    5 16,
    000 138,
    000
    6 3,
    000 141,
    000
    7 85,
    000 226,
    000

    $150,
    000-$141,
    000=$9,
    000/
    $85,
    000=.
    11

    d.Theprojectisquant
    it
    ati
    vel
    yunacceptabl
    ebecausei thasanegati
    veNPV,aless-
    than-onePI ,andapay backperiodofoversixyears.Howev er,
    theNPVandPIar e
    extr
    emelyclosetobeingaccept
    able.Becausethenewmachi newillpr
    ovi
    deXYZzer o-defectproduct
    ion,theinvest
    mentmaybedesi rableifaddi
    ti
    onalqual
    it
    ati
    ve
    fact
    orsareconsider
    edsuchasi mprovedcompet i
    ti
    veposi
    ti
    on,customersat
    isf
    acti
    on, goodwi l
    lgener
    ated,improvedproductquali
    tyandr el
    iabi
    li
    ty,
    andadesireto
    beintheforefr
    ontofmanufact
    uri
    ngcapabili
    ty.XYZmaywantt oatt
    empttoquanti
    fythesebenef it
    sandr eeval
    uatethemachine'
    saccept abil
    i
    tyasani nv
    estment.
    ccci
    i
    i
    118. Nomat t
    erwhathappens, t
    het axr
    ateforthenexttwoy earsis30percent
    .Usi ngthedi f
    fer
    encesi ndepreci
    ationamount s,
    onecandet erminethedi
    ff
    erence
    inpresentvaluesbet weent hetwomethodsattheendofy ear2whent het
    axrateisexpect edtochange.
    Presentvaluecalculati
    onsfory ears1and2:
    Year1( $20,000) .30 . 9091= $(5,
    455)
    Year2( $25,000) .30 . 8265= $(6,
    199)
    Totalpresentv al
    uediff
    erenceatend $(11,
    654)
    So,aftert
    hef ir
    sttwoy ears,Met hod1hasgenerated$11,654mor epresentval
    uet hanMethod2.Thi ssimplymeanst hatatt hepointofindi
    ffer
    ence,Method2woul dbe
    requir
    edt ogener ate$11,654mor epresentvaluethanMet hod1i nthelastthreeyears.Fort helastthreeyearsoft hepr oj
    ect'
    sli
    fe,thediff
    erenceindepr
    eciati
    on
    amount sis$15,000.This$15, 000amountcanbeusedi nthef ol
    l
    owingequationtosolvef orthetaxratethatyi
    eldsapresentv al
    ueof$11, 654:

    $11,
    654=$15,000 taxrat
    e (
    .7513+.
    6830+.
    6209)
    $11,
    654=$30,828 taxrat
    e
    Taxrat
    e=$11,654/
    $30,828
    Taxrat
    e=37.8%

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page171of171
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Thus,
    ani
    ncr
    easei
    nthet
    axr
    atet
    oabout37.
    8per
    centwoul
    dcausemanagementt
    obei
    ndi
    ff
    erentbet
    weent
    het
    wodepr
    eci
    ati
    onmet
    hods.

    ccci
    v
    . Divi
    ding$200,
    000/
    $60,
    000,gi
    vestheannui
    tydiscountfact
    or(3.
    3333)for11per centassoci
    atedwit
    ht heminimalrequi
    redt
    imef
    ort
    hispr
    ojectt
    obe
    successf
    ul.Accordi
    ngtothet
    abl
    esinAppendi
    xA,t
    heproj
    ectwillhaveaposi
    ti
    venetpresentv
    alueifthecashfl
    owslastt
    hroughyear5.

    cccv
    .
    (1)
    Unadjusted Infl
    ati
    on I
    nfl
    ati
    onAdj ust
    ed
    Year Esti
    mat eof Adjust
    ment Est
    imateofCash
    CashI nfl
    ows I
    nfl
    ows
    1 $50,000 1.
    100 $55,000
    2 40,
    000 1.
    210 48,
    400
    3 30,
    000 1.
    331 39,
    930
    $120,000 $143,330

    (
    2)
    Unadjusted Adjusted PVof$1@ PVof PVof
    Yea CashFl owsCashFl ows 16% Unadjusted Adj usted
    r CashFl ows CashFl ows
    0 $( 100,000)$(100,000) 1.000 $(100,000) $(100,000)
    1 50,
    000 55,000 .
    862 43,100 47,410
    2 40,
    000 48,400 .
    743 29,720 35,961
    3 30,
    000 39,930 .
    641 19,230 25,595
    Netpr
    esentv al
    ueofinvestment $( 7,
    950) $ 8,966
    cccv
    i
    .
    Est
    imatedNetPr
    etax 4%AnnualPri
    ce- Price-level
    Yea CashInf
    lows l
    evel
    Adjust
    ment AdjustedNet
    r CashI nf l
    ows
    1
    1 $10, 000 (
    1+.
    04)=1.
    040 $10, 400
    2
    2 15,000 (
    1+.
    04)=1.
    082 16,230
    3
    3 15,000 (
    1+.
    04)=1.
    125 16,875
    4
    4 15,000 (
    1+.
    04)=1.
    170 17,550
    5
    5 10,000 (
    1+.
    04)=1.
    217 12,170
    6
    6 5,000 (
    1+.
    04)=1.
    265 6,325
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page172of172
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Tot al
    priceleveladjustednetpret
    axcashinf
    lowsfr
    om operati
    ons$79,
    550
    Pluscashi nfl
    owf rom salvage $2,
    500
    Priceleveladjustment 1.
    265 3,
    163
    Tot al
    price-l
    eveladjustednetpret
    axcashinf
    lowsoverini
    ti
    alcashoutf
    low$82,
    713
    Lessi ni
    tial
    cashout flow 50,
    000
    Excessofnetpr etaxcashinfl
    owsoverini
    ti
    alcashoutfl
    ow $32, 713
    cccv
    ii
    .
    (
    1) (2) (1)x( 2)=(3)
    Per
    iodi
    c 4%Price-
    lev
    el I
    nfl
    ationAdjusted
    Year CashInfl
    ows Adj
    ustment Esti
    mat eofCash
    Infl
    ows
    1
    1 $25,000 (
    1+.
    04)=1.
    040 $26,000
    2
    2 27,
    000 (
    1+.
    04)=1.
    082 29,
    214
    3
    3 29,
    000 (
    1+.
    04)=1.
    125 32,
    625
    4
    4 23,
    000 (
    1+.
    04)=1.
    170 26,
    910
    5
    5 20,
    000 (
    1+.
    04)=1.
    217 24,
    340
    6
    6 15,
    000 (
    1+.
    04)=1.
    265 18,
    975
    $139,000 $158, 064

    (
    1) (
    2) (
    1)x(
    2) =(
    3)
    Depreciable 5-
    YearPropert
    y
    Year Basisof Recovery TaxDepr
    eci
    ati
    on
    Proper t
    y Percent
    age
    1 $100,000 0.200 $20, 000
    2 100,000 0.320 32,000
    3 100,000 0.192 19,200
    4 100,000 0.115 11,500
    5 100,000 0.115 11,500
    6 100,000 0.058 5,800
    $100, 000

    (
    1) (
    2) (
    1)-(
    2) (
    3)x (
    1)-(5) (
    4)
    =(
    3) (4) (
    6)
    (5)
    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page173of173
    MANAGEMENTADVI
    SORYSERVI
    CES CAPI
    TALBUDGETI
    NG

    Year Adjusted Taxable Feder


    al
    Esti
    mat eof Tax Income IncomeNetAf ter
    -andState
    NetCash Depr eci
    ati( Loss) Tax t axCash I ncome
    I
    nflows on Inf
    lows TaxRat e
    1 $26, 000 $20,000 $ 6, 00 $2,40 $23,600 40%
    0 0
    2 29,214 32,000 ( 2,786) (1,11 30,328 40%
    4)
    3 32,625 19,200 13, 425 5,370 27,255 40%
    4 26,910 11,500 15, 410 6,164 20,746 40%
    5 24,340 11,500 12, 840 5,136 19,204 40%
    6 18,975 5,800 13, 175 5,270 13,705 40%

    Totalesti
    mat ednetaft
    er-
    taxcashinf
    lowsfrom project $134,
    838
    Lessinit
    ialcashoutf
    lowformachinery 100,
    000
    Excessofaf ter
    -t
    axcashinfl
    owsfrom proj
    ectoveriniti
    alcashoutfl
    ow$34,
    838
    cccv
    ii
    i
    .
    Proport
    ion Af
    ter-
    tax Wei
    ghted
    Funds—Sour ce ofFunds Cost Cost
    Bonds .25 .071 .018
    Preferredst
    ock .25 .152 .
    0375
    Common st ock and r
    etai
    ned .50 .143 .070
    earnings
    1.
    00 .
    1255 or12.
    55%

    Comput
    ati
    ons:
    1
    .
    12-( .12x.4)
    2
    $15/$100=. 15
    3
    $105,000/25,
    000=$4.
    20;
    $4.
    20/
    $30=.
    14

    CMAEXAMI
    NATI
    ONQUESTI
    ONS Page174of174

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