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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
Page 25
5) Sun Company is considering purchasing new equipment costing \$350,000. Sun's management has estimated that
the equipment will generate cash inflows as follows:
Year 1
\$100,000
Year 2
\$100,000
Year 3
\$125,000
Year 4
\$125,000
Year 5
\$75,000
Using the table below, please calculate the profitability index of the project using a discount rate of 10%.
round all calculations to the nearest whole dollar.
Present Value
of \$1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
0.907
0.890
0.873
0.857
0.842
0.826
3
0.864
0.840
0.816
0.794
0.772
0.751
4
0.823
0.792
0.763
0.735
0.708
0.683
5
0.784
0.747
0.713
0.681
0.650
0.621
A) 1.67
B) 2.07
C) 1.20
D) 1.14
D
Explanation:
D) Calculations:
Net Cash Flows
Factors
NPV
\$100,000.00
0.909
\$90,900
\$100,000.00
0.826
\$82,600
\$125,000.00
0.751
\$93,875
\$125,000.00
0.683
\$85,375
\$75,000.00
0.621
\$46,575
\$399,325
Investment
\$350,000
Profitability index
1.141
Calculation:
\$399,325/\$350,000 = 1.141
Diff: 3
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
25

Page 26
6) Which of the following describes the term
time value of money
?
A) Money can only be used at certain times and for certain purposes.
B) Money loses its purchasing power over time through inflation.
C) Wasted time can result in wasted money.
D) When money is invested over time, it earns income and grows.
D
Diff: 1
LO:
21-3
EOC Ref:
Accounting Vocabulary
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
7) Which of the following MOST accurately describes the term
annuity
?
A) An investment which grows in value over time
B) An installment loan with amortizing principal payments
C) A stream of equal installments of cash payments
D) A term life insurance policy
C
Diff: 1
LO:
21-3
EOC Ref:
Accounting Vocabulary
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
8) If \$1,000 is invested in an account with 4% interest compounding yearly, what will the balance of the account be
after 4 years?
(You may ignore small differences that result from rounding.)
A) \$1,218
B) \$1,170
C) \$1,040
D) \$1,240
B
Explanation:
B) Calculations:
\$1,000.00
104%
\$1,040.00
\$1,040.00
104%
\$1,081.60
\$1,081.60
104%
\$1,124.86
\$1,124.86
104%
\$1,169.86
Diff: 2
LO:
21-3
EOC Ref:
S21-8
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
26

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