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IMANET Exam CMA Topic 4 Question 85 Discussion

Actual exam question for IMANET's CMA exam

Question #: 85
Topic #: 4

[All CMA Questions]

The Hopkins Company has estimated that a proposed project's 10-year annual net cash benefit, received each year end. will be $2,500 with an additional terminal benefit of $5,000 at the end of the 10th year. Assuming that these cash inflows satisfy exactly Hopkins' required rate of return of 8%, calculate the initial cash outlay

A$16,775

B$19,090

C$25,000

D$30,000

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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Terrilyn

5 months ago

Based on my calculations, I think the correct answer is B) $19,090.

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Corinne

5 months ago

I believe we should use the formula to calculate the initial cash outlay.

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Avery

6 months ago

The required rate of return is 8%, so we need to factor that in our calculations.

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Terrilyn

6 months ago

Yes, the net cash benefit each year is $2,500 and there's a terminal benefit too.

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Corinne

7 months ago

I think we need to calculate the initial cash outlay for the proposed project.

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Lynelle

7 months ago

The option C) $Beth5,000 seems to be the correct initial cash outlay.

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Mary

7 months ago

Now, we subtract this present value from the initial cash outlay to find the answer.

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Beth

7 months ago

I got the present value of the cash flows as $5,000.

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Lynelle

7 months ago

Exactly. Let's use the formula for calculating present value of annuity and terminal value.

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Mary

7 months ago

So, we need to calculate the present value of these cash flows.

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Beth

7 months ago

The annual net cash benefit is $,500 for Lynelle0 years and a terminal benefit of $5,000. The required rate of return is 8%.

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Lynelle

7 months ago

I think we need to calculate the initial cash outlay for the project.

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