IMANET CMA Exam - Topic 4 Question 102 Discussion

Actual exam question for IMANET's CMA exam

Question #: 102
Topic #: 4

The U.S. Postal Service is looking for a new machine to help sort the mail. Two companies have submitted bids to Cliff Kraven, the postal inspector responsible for choosing a machine. A cash flow analysis of the two machines indicates the following:

It the cost of capital for the Postal Service is 8%. which of the two mail sorters should Cliff choose and why?

AMachine A . because NPV of A > NPV of B . by $1,044.

BMachine B . because NPV of A > NPV of B . by $22,000.

CMachine A . because NPV of A > NPV of B . by $8,000

DMachine B . because IRR of A > IRR of B

Show Suggested Answer

Suggested Answer: A

The NPV of both machines must be calculated and compared to determine which will yield a better return of cash flows. Machine A is calculated as one lump sum payable in 4 years minus the initial investment cost.

The NPV of Machine B is calculated as the present value of an ordinary annuity of

$13,000 for 4 years, minus the initial investment cost.

By comparing the NPV of both machines, Cliff would choose Machine A because NPV of A > NPV of B by $1,044.

by Benedict at Oct 23, 2024, 04:18 PM

Limited Time Offer

25%

Off

Get Premium CMA Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Chara

6 months ago

Machine B's IRR being higher could be a game changer too!

upvoted 0 times

...

Izetta

6 months ago

Totally agree with Machine A! $1,044 is still a solid margin.

upvoted 0 times

...

Dalene

6 months ago

Wait, are we sure about those numbers? $22,000 seems off.

upvoted 0 times

...

Osvaldo

7 months ago

I think Machine B is the better option. The NPV difference is huge!

upvoted 0 times

...

Eric

7 months ago

Machine A has a higher NPV, so it makes sense to choose it.

upvoted 0 times

...

Carlee

7 months ago

I’m not clear on whether we should focus on NPV or IRR for this question. I thought both metrics were important, but I’m unsure how they apply here.

upvoted 0 times

...

Natalya

7 months ago

I feel like Machine B might be the right choice since it seems like it had a significantly higher NPV in one of our case studies.

upvoted 0 times

...

Sharee

7 months ago

I think Machine A has a higher NPV based on our practice questions, but I can't recall the specific numbers we used.

upvoted 0 times

...

Eden

8 months ago

I remember we discussed how to calculate NPV and that the higher NPV is usually the better choice, but I’m not sure about the exact values here.

upvoted 0 times

...

Buck

8 months ago

No problem, I've got this. The question clearly states to choose the machine with the higher NPV, so that's what I'll focus on. I just need to be careful to discount the cash flows at the 8% cost of capital.

upvoted 0 times

...

Alonso

8 months ago

I'm a little confused on how to approach this. Should I be looking at the IRR instead of the NPV? Or is there some other factor I'm missing? I want to make sure I get this right.

upvoted 0 times

...

Golda

8 months ago

Okay, I think I've got this. The key is to use the given cost of capital of 8% to discount the cash flows and find the NPV. Then I just need to compare the NPVs and choose the higher one.

upvoted 0 times

...

Geoffrey

8 months ago

Hmm, this seems like a classic capital budgeting problem. I'll need to calculate the NPV for each machine and compare them to determine which one has the higher NPV.

upvoted 0 times

...

Micaela

2 years ago

Wait, was this question sponsored by the Postal Service? I bet they're trying to get us to choose the more expensive option just to line their own pockets. Sneaky, sneaky!

upvoted 0 times

...

Von

2 years ago

I just hope Cliff doesn't get the machines mixed up and end up with a machine that can only sort mail by the color of the envelope. That would be a real 'first-class' disaster!

upvoted 0 times

...

Colby

2 years ago

Hmm, I'm not so sure. Option D seems interesting to me. If the internal rate of return for Machine A is higher than Machine B, that could be a compelling reason to choose it.

upvoted 0 times

Mattie

1 year ago

I see your point, but Machine A has a higher NPV than Machine B by $8,000. That's still a good reason to choose it.

upvoted 0 times

...

Elouise

1 year ago

But Machine B has a higher NPV than Machine A by $22,000. That seems like a significant difference.

upvoted 0 times

...

Isidra

1 year ago

I think Machine A is the better choice because its NPV is higher than Machine B by $1,044.

upvoted 0 times

...

Stanton

2 years ago

I'm going with C. The NPV of Machine A is $8,000 higher than the NPV of Machine B, so that's the better option in my opinion.

upvoted 0 times

Natalie

1 year ago

In that case, Machine A it is. Let's go with the safer option.

upvoted 0 times

...

Monroe

1 year ago

That's true, but NPV is usually considered a more reliable measure for investment decisions.

upvoted 0 times

...

Valentin

1 year ago

But what about the IRR? Machine B has a higher IRR, maybe that's important too.

upvoted 0 times

...

Hobert

1 year ago

I agree with you, Machine A seems like the better choice with a higher NPV.

upvoted 0 times

...

France

2 years ago

But Machine B has a higher IRR, so maybe that's a better choice.

upvoted 0 times

...

Lou

2 years ago

I think the answer is A. The net present value of Machine A is greater than the net present value of Machine B by $1,044, so that's the clear choice here.

upvoted 0 times