IMANET Exam CMA Topic 4 Question 102 Discussion

Actual exam question for IMANET's CMA exam

Question #: 102
Topic #: 4

[All CMA Questions]

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

Micaela

6 months 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

6 months 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

7 months 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

6 months 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

6 months ago

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

upvoted 0 times

...

Isidra

6 months ago

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

upvoted 0 times

...

8 months 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