IMANET Exam CMA Topic 4 Question 85 Discussion

Actual exam question for IMANET's CMA exam

Question #: 85
Topic #: 4

[All CMA Questions]

A characteristic of the payback method (before taxes) is that it

AIncorporates the time value of money.

BNeglects total project profitability.

CUses accrual accounting inflows in the numerator of the calculation.

DUses the estimated expected life of the asset in the denominator of the calculation.

Show Suggested Answer

Suggested Answer: B

If the 8% return exactly equals the present value of the future flows ., NPV is zero), then simply determine the present value of the future inflows. Thus, Hopkins Company's initial cash outlay is $19,090 [($2,500)(PVIFA at 8% for 10 periods) + ($5J00)(PVlF at 8% for 10 periods ($2,500)(6.710) + ($5,000)(.463)].

by Benedict at Apr 20, 2024, 06:09 AM

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Laurel

2 months ago

Option C is my pick. Using accrual accounting inflows in the numerator just seems like the logical way to do it.

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Pa

9 days ago

I'm not sure about that, I think it uses the estimated expected life of the asset in the denominator.

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Lavina

24 days ago

I believe it incorporates the time value of money.

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Rodolfo

1 months ago

I think it neglects total project profitability though.

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Annett

1 months ago

I agree, using accrual accounting inflows makes sense.

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Reyes

2 months ago

Haha, the payback method is like trying to catch a greased pig - it might work, but it's not the most reliable way to evaluate a project!

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Royal

2 months ago

I think Option D is the way to go. Using the expected life of the asset in the denominator makes sense for the payback calculation.

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Dana

2 months ago

Option B is the correct answer. The payback method doesn't consider the overall profitability of the project, only the time it takes to recoup the initial investment.

upvoted 0 times