IMANET Exam CMA 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

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France

19 days ago

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

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Lou

22 days 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.

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