IMANET CMA Exam - Topic 3 Question 6 Discussion

Actual exam question for IMANET's CMA exam

Question #: 6
Topic #: 3

Mobile Home Manufacturing, Inc. is evaluating a proposed acquisition of a new machine at a purchase price of $380,000 and installation charges that will amount to $20,000. A $15,000 increase in working capital will be required The machine will hate a useful life of four years, after which it can be sold for $50,000. The estimated annual incremental operating revenues and cash operating expenses are $750,000 and $500,000. respective, for each of the four years. Mobile Home's tax rate is 40%, and the cost of capital is 12%. Mobile Home uses straight-line depreciation for both financial reporting and income tax purposes. If Mobile Home accepts the project, the initial investment will be

A$350,000

B$365,000

C$385,000

D$415,000

Show Suggested Answer

Suggested Answer: D

The net initial investment for a capital project consists of three components: the purchase of new equipment, the increase in working capital, and the salvage value of old equipment Mobile Home Manufacturing's calculation is thus as follows:

by Noah at May 07, 2022, 07:05 AM

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Valda

7 months ago

Just to clarify, that includes the working capital too, right?

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Mee

7 months ago

Yup, $415,000 makes sense with all those costs.

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Salome

7 months ago

Wait, are we sure about that? Seems a bit high.

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Jolene

7 months ago

Totally agree, it's definitely $415,000!

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Shelton

8 months ago

The total initial investment is $380,000 + $20,000 + $15,000 = $415,000.

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Tammy

8 months ago

I believe the initial investment is the sum of all upfront costs, so I’m leaning towards option C, but I need to double-check the numbers.

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Micah

8 months ago

I practiced a similar question where we had to factor in depreciation, but I’m confused about how it affects the initial investment here.

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Ceola

8 months ago

I think the total should be the machine cost plus installation and working capital, but I can't recall if we add the salvage value right away.

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Susana

8 months ago

I remember we calculated initial investments in class, but I'm unsure if I should include the working capital in the total.

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Cristal

8 months ago

Okay, I think I know the answer here. The two interface protocol policies need to be combined into a single policy, so the ACI object that must be used is an interface policy group.

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