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IMANET Exam CMA Topic 5 Question 73 Discussion

Actual exam question for IMANET's CMA exam
Question #: 73
Topic #: 5
[All CMA Questions]

For capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management

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Suggested Answer: D

The estimated incremental after-tax operating cash flows for each year of a capital project consist of two components: the after-tax cash inflows from operations and the depreciation tax shield arising from the purchase of new equipment. The first of these for Pauley can be calculated as follows:

Pauley's total after-tax operating cash inflow for each year of the project's life is thus $36,000 ($30,000 + $6,000). Ii the final year of the project, two additional cash flows must be taken into account, the after-tax proceeds from the disposal of the equipment purchased for the project, and the recovery of working capital devoted to the project. These two additional cash flows can be calculated as follows:

Pauley's total after-tax cash inflow for the final year of the project's life is thus $49,000

($36,000 + $13,000).


Contribute your Thoughts:

Yvonne
13 days ago
Equity funding exclusively? Now that's a bold move. I wonder if management is trying to avoid those pesky bank loans and their annoying interest rates. Might as well go all-in on the company's own money, right?
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Dorothy
15 days ago
B? Really? I thought management was all about rejecting proposals, not the other way around. Hmm, maybe they're just feeling generous today.
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Julie
23 days ago
D, for sure. Risk is the name of the game in capital budgeting. Management wants to make sure they're not gambling the company's future on risky ventures. Cautious, but smart.
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Salena
1 months ago
Ah, the classic high hurdle rate question! Management is clearly trying to weed out all but the most profitable projects. Gotta keep that bottom line looking good, even if it means saying no to a few good ideas.
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Mi
15 days ago
A) Wants to use equity funding exclusively.
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Rutha
2 months ago
But wouldn't a high hurdle rate also mean rejecting more proposals? Maybe management believes too many are being rejected.
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Maybelle
2 months ago
I agree with Wilda. It's important to consider risk when making investment decisions.
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Wilda
2 months ago
I think management would select a high hurdle rate to factor risk into project consideration.
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