Investment Decisions: CMA Exam 2 - Section E

Author: Tom Coghlan

The capital budgeting process, discounted cash flow analysis, payback, and related topics will be covered here.

Whether you take the CMA exam or not, using your CPE credits to review the material tested on the Certified Management Accountant exam will help you to close the skills gap and move from compiling and reporting the results to a seat at the management table.

For more than 40 years, the CMA (Certified Management Accountant) certification has been the global benchmark for management accountants and financial professionals. Why? Because CMAs can explain the "why" behind numbers, not just the "what." And that can give you greater credibility, higher earning potential, and ultimately a seat at the leadership table.

Using CPE credits to prepare for the Certified Management Accountant (CMA) exam is a pathway to a more successful business career: one that opens doors, builds confidence, closes skills gaps, and lets you tap into a network of 85,000 professionals around the globe.

The CMA certification complements other credentials or degrees and tests for analytical and critical-thinking skills not covered in other exams. About one in three active CMAs in the U.S. are also CPAs.

The Certified Managerial Accountant (CMA) designation delivers:
1) The ability to see the big picture, both operational and financial.
2) The know-how to leverage technology, especially as it relates to gathering and analyzing data.
3) Insight into financial implications of business decisions and the ability to communicate them in way that is clear and jargon-free.

Publication Date: April 2017

Designed For
Financial officers, controllers and chief financial officers; financial, managerial and cost accountants; financial and business analysts; budget managers and analysts; risk managers; chief information officers and information technology professionals.

Topics Covered

• Capital Budgeting Process
• Discounted Cash Flow Analysis
• Payback and Discounted Payback
• Risk Analysis in Capital Investment

Learning Objectives

• Define capital budgeting and the steps undertaken in developing and implementing capital budgets.
• Distinguish between cash flows and accounting profits.
• Distinguish relevant and irrelevant costs related to capital budgeting.
• Discuss the relevance to capital budgeting of incremental cash flow, sunk cost and opportunity costs.
• Identify and calculate the pre-tax and post-tax cash flows related to the initial investment of a capital project.
• Identify and calculate the pre-tax and post-tax cash flows during the period the project is in operation from revenue, operating expense, and changes to working capital.
• Identify and calculate the pre-tax and post-tax cash flows related to the end of a capital projects life.
• Demonstrate an understanding of the factors that influence the discount rates used for capital projects.
• Identify and apply the correct use of present value of a single payment and present value of an annuity.
• Demonstrate an understanding of payback method and discounted payback methods.
• Calculate payback and discounted payback periods.
• Identify the advantages and disadvantages of the payback and discounted payback methods.
• Demonstrate an understanding of the Net Present Value (NPV) and Internal Rate of Return (IRR) methods.
• Calculate NPV and IRR and demonstrate an understanding of the decision criteria of each method to determine acceptable projects.
• Compare NPV and IRR, focusing on the advantages and disadvantages of each.
• Define capital rationing, mutually exclusive, and independent projects.
• Identify and discuss the problems comparing projects of unequal sizes and/or unequal lives.
• Identify alternative approaches to dealing with risk in capital investments.
• Distinguish among sensitivity analysis, scenario planning, and Monte Carlo simulation as risk analysis techniques.
• Explain why rates should be adjusted if project cash flows are more or less risky than normal.
• Demonstrate an understanding of real options and identify different types of real options.
• Explain how the value of a capital investment is increased if real options - adding on, speeding up, slowing down, or discontinuing early — are considered.

Level
Overview

Instructional Method
Self-Study

NASBA Field of Study
Finance (3 hours)

Program Prerequisites
None

Advance Preparation
None