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21.doc-Accounting, 9e, Global Edition (Horngren) Chapter
Page 66
29) Beta Company is considering an investment in a new storage facility that would require an initial outlay of
$250,000, and would yield yearly cash flows of $48,000 for 8 years.
Beta uses a discount rate of 7%
What is the
NPV of the investment?
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
A) $36,608
B) $24,177
C) $13,184
D) $44,000
Answer:
A
Explanation:
A) Calculations: $250,000 - (5.971 × $48,000) = $36,608
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
66
Copyright © 2012 Pearson Education
Page 67
30) Centurion Company is considering a mineral extraction project which requires an initial investment of
$2,000,000 and will yield annual cash flows of
$300,000 for 8 years.
Centurion has an 8% hurdle rate.
What is the
NPV of the project?
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
A) Positive $275,900
B) Negative $275,900
C) Positive $103,184
D) Negative $240,000
Answer:
B
Explanation:
B) Calculations: $2,000,000 - (5.747 × $300,000) = ($275,900)
Diff: 2
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
31) Which of the following would be the best basis on which to accept an investment opportunity?
A) If it has positive net cash flows
B) If it has a payback period in less than 10 years
C) If the investment's
rate of return is higher than the company's current year rate of return
D) If the net present value of all cash flows is positive
Answer:
D
Diff: 1
LO:
21-4
EOC Ref:
E21-22
AACSB:
Analytic Skills
AICPA Business:
Critical Thinking
AICPA Functional:
Measurement
67
Copyright © 2012 Pearson Education
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