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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
Page 22
2) Simms Manufacturing is considering two alternative investment proposals with the following data:
Proposal X
Proposal Y
Investment
$620,000
$400,000
Useful life
8 years
8 years
Estimated annual net cash inflows for 8
years
$130,000
$80,000
Residual value
$0
$0
Depreciation method
Straight-line
Straight-line
Discount rate
9%
10%
Present Value of
an Annuity of $1
5%
6%
7%
8%
9%
10%
1
0.952
0.943
0.935
0.926
0.917
0.909
2
1.859
1.833
1.808
1.783
1.759
1.736
3
2.723
2.673
2.624
2.577
2.531
2.487
4
3.546
3.465
3.387
3.312
3.240
3.170
5
4.329
4.212
4.100
3.993
3.890
3.791
6
5.076
4.917
4.767
4.623
4.486
4.355
7
5.786
5.582
5.389
5.206
5.033
4.868
8
6.463
6.210
5.971
5.747
5.535
5.335
9
7.108
6.802
6.515
6.247
5.995
5.759
10
7.722
7.360
7.024
6.710
6.418
6.145
After calculating the net present value of the two alternatives, Proposal Y appears to deliver the most
favorable results.
Answer:
FALSE
Explanation:
Calculations:
(5.335 × $80,000) - $400,000 = $26,800
(5.535 × $130,000) - $620,000 = $99,550
Diff: 3
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
22
Copyright © 2012 Pearson Education
Page 23
3) 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 factors in the table below, please calculate the net present value of the net cash inflows above,
using a discount rate of 10%.
Please 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) $399,325
B) $342,800
C) $401,667
D) $399,761
Answer:
A
Explanation:
A) Calculations:
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
Diff: 3
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
23
Copyright © 2012 Pearson Education
Page 24
4) 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 factors in the table below, please calculate the net present value of the investment project (including initial
investment plus the NPV of the net cash inflows above) using a discount rate of 10%.
Please 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) $41,667
B) $49,325
C) $41,667
D) $39,761
Answer:
B
Explanation:
B) 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
0
$399,325
Investment
($350,000)
NPV of project
$49,325
Diff: 3
LO:
21-3
EOC Ref:
S21-7
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
24
Copyright © 2012 Pearson Education
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