IMANET CMA Exam - Topic 6 Question 23 Discussion

Actual exam question for IMANET's CMA exam

Question #: 23
Topic #: 6

Garfield, Inc. is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000. and Garfield expects to sell the equipment for $9,000 at the end of the tenth year The equipment will be depreciated over 7 years The project requires a working capital investment of $7,000 at its inception and another $5,000 at the end of Year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the tenth year is?

A$32,000

B$24,000

C$20,000

D$11,000

Show Suggested Answer

Suggested Answer: B

The project will have an $11,000 before-tax cash inflow from operations in the tenth year ($40,000 --- $29,000). Also, $9,000 will be generated from the sale of the equipment. The entire $9,000 will be taxable because the basis of the asset was reduced to zero in the 7th year. Thus, taxable income will be $20,000 ($11,000 + $9,000), leaving a net after-tax cash inflow of $12,000 [$20.000 x (1.0--- .4)] To this $12,000 must be added the $12,000 tied up in working capital ($7,000 + $5,000). The total net cash flow in the 10th year will therefore be $24.O0j

by Gregoria at May 04, 2022, 11:38 AM

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Ula

7 months ago

I’m not sure about those expenses, seems tight!

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Vivienne

7 months ago

After taxes, I think it’s closer to $20,000.

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Nguyet

7 months ago

Wait, how does the working capital affect cash flow?

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Bethanie

8 months ago

Sounds like a solid investment to me!

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Nidia

8 months ago

The initial cost is $23,000 and revenues are $40,000 per year.

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Buddy

8 months ago

I believe we need to subtract the tax impact on the operating income, but I can't recall the exact formula for that.

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Justine

8 months ago

I’m a bit confused about how the working capital affects the cash flow in the tenth year. Do we add it back or is it already included?

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Isabella

8 months ago

I remember a similar question where we had to account for the salvage value at the end. I think that might be important here too.

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Nobuko

8 months ago

I think we need to calculate the net cash flow by considering revenues, expenses, and taxes, but I'm not sure about the depreciation impact.

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Cyril

8 months ago

I think the answer is A - low risk capacity, high risk appetite. The organization is taking big risks even though they can't afford the losses, which means their risk capacity is low but their risk appetite is high.

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Sunny

8 months ago

Hmm, I'm a bit unsure about this. I'll need to think through the implications of each approach before deciding.

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Tammara

8 months ago

I'm not so sure, but I feel like counting user-reported problems as a measure of test quality could lead to frustration.

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Jamal

8 months ago

From what I practiced, using the PolarDB console should be correct, but I feel like I've seen questions that tricked me about that before.

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Adelle

8 months ago

Hmm, I'm a bit unsure about this one. The project scope statement and resource calendars seem like they could be used in a few different time management processes. I'll have to think this through carefully.

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