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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 62
17) Allied Chemicals has a hurdle rate of 9% for new investments.
The production manager suggests that an
equipment upgrade costing \$84,460 would yield net cash flows of \$40,000 in the first year, \$30,000 in the second
year, \$20,000 in the third year, and \$10,000 in the fourth and final year.
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
The investment meets the company's hurdle rate requirement and should be adopted.
TRUE
Explanation:
Calculations:
\$40,000
0.917
36,680
\$30,000
0.842
25,260
\$20,000
0.772
15,440
\$10,000
0.708
7,080
(84,460)
0
Diff: 3
LO:
21-4
EOC Ref:
E21-24
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
18) If an investment project's IRR is higher than the company's hurdle rate, the company should go forward with the
investment.
TRUE
Diff: 1
LO:
21-4
EOC Ref:
E21-24
AACSB:
Reflective Thinking
Critical Thinking
AICPA Functional:
Measurement
19) The rate of return and payback methods DO NOT take into consideration the time value of money.
Discounted
cash flow methods DO make use of the time value of money.
TRUE
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
62

##### Page 63
20) Which of the following is TRUE of discounted cash flow methods like NPV and IRR?
A) They use simple interest calculations.
B) They use net income amounts rather than cash flows.
C) They focus on the payback period.
D) They incorporate compound interest calculations.
D
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
21) Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash
TRUE
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
22) Which of the following is TRUE of discounted cash flow methods like NPV and IRR?
A) They use simple interest calculations.
B) They assume that cash flows will be reinvested when received.
C) They focus on the payback period.
D) They must follow the rules of GAAP.
B
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
23) Cash flows used in NPV and IRR analyses include all of the following EXCEPT:
A) future increased sales.
B) future cost savings.
C) depreciation expense.
D) residual value.
C
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
Critical Thinking
AICPA Functional:
Measurement
63

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